Negative interest rates might not offer an eye-catching headline like Brexit or Covid-19, but for investors they could be far more significant.
Last month, minutes from the Bank of England’s Monetary Policy Committee meeting showed it was exploring how to implement a negative Bank Rate. This would be the first time in history official rates fell below zero. And the outlook for inflation means it could be warranted.
But what does that mean for your portfolio of stocks and funds?
Allow me to take you on a journey to Japan. The land of the rising sun has struggled with deflation for the best part of two decades. It turned to negative interest rates to boost its economy and drag itself out of the downward spiral of falling prices.
However, this failed to help the stock market and until recently Japanese share prices languished in what was known as the “lost decades”. Investors made little-to-no return.
This will, and should, put British investors on edge. But another cut to the Bank Rate from its 0.1pc level may actually be positive for some British businesses.
Fast-growing companies should do well. Cheaper debt will encourage companies to take out loans at lower rates and invest in the business. We spoke with Paul Derrien at wealth manager Canaccord Genuity this week, who highlighted B&M European Retail and DS Smith as companies that could motor in a negative-interest rate world.
Stocks with lots of debt, such as utilities, could also benefit and can refinance loans at lower rates. This should lead to lower costs. Severn Trent and National Grid are decent businesses that may see profits rise if rates go minus, with business models largely unaffected.
Of course, where there are winners there are losers. Banks have been under pressure since the financial crisis and will suffer further. They rely on the Bank Rate to set the interest they charge, and the lower the Bank Rate the less profit they make.
Investors should avoid all banks, but particularly those reliant on Britain. This includes Lloyds Banking Group (which owns Lloyds, Halifax and Bank of Scotland) and NatWest, which owns Royal Bank of Scotland.
Companies with large pension deficits such as BT, supermarket chain Tesco and defence firm BAE, should also be avoided.
The cost of providing a guaranteed pension is based on the yield on government bonds, which would fall if the Bank Rate went negative. The lower the yield, the higher the cost. Companies would have to put more money into their pension schemes, taking capital away from other areas.
Negative rates were once a far-fetched idea, but Japan and the eurozone have turned to them in desperate times. They impact more than investments as well, as we discuss here, and it is something Britons should be ready for.