What to Invest in While Interest Rates Are Near Zero?

The abundance of cheap money in the world is prompting investors to take on unprecedented risks in pursuit of returns in an environment of interest rates hovering near zero, introduced after the onset of the financial crisis in 2007, spanning from the USA to the Eurozone.

Nearly a decade of cheap money has helped these countries navigate the crisis more easily, but at a high cost for savers, whose earnings from traditional forms of investment, such as bonds, are limited, leading many of them to seek riskier, unconventional alternatives.

Interest in hedge funds, real estate, art, and wine has surged. This shift is particularly pronounced in Sweden, where interest rates have been at very low levels for a long time.

The renowned auction house in Stockholm, Bukowskis, is experiencing increasing demand for Swedish art and Scandinavian designer furniture. “Online sales in Sweden are growing very strongly. Prices are indeed rising significantly, and I don’t think they have peaked,” said Paulina Sokolow, creative director at Bukowskis.

A lot can be earned from wine, for example. A case of 12 bottles of Chateau Mouton-Rotschild, vintage 2000, has seen its value rise from around $2,800 to $18,600, which is its current value. And the bonus is that you can always drink it, no matter what happens to its price.

“Returns seem attractive in the current environment. So if everything goes wrong, you will still have tangible assets,” said Tom Gearing, CEO of the British wine investment company Cult Wines.

Accumulation of Money

The chief investment strategist at the Swedish bank SEB, Hans Peterson, says that many clients are in search of new forms of investment. “Clients are frustrated. This leads them to have to buy cyclically sensitive categories of assets, such as stocks, which can make these markets even more volatile. Investors are also investing in real estate.”

The surge in prices for Swedish pieces of furniture and carpets is occurring in a country where real estate prices have jumped by 36 percent since the end of 2013. Last year’s sale of an apartment in Stockholm for $12 million set a new record, although such a thing would hardly attract attention in London or New York. The strong price boom has been partly fueled by tax incentives, but also by interest rates hovering near zero that turned negative last year.

The negative interest rate increases costs for banks and is designed to encourage them to lend more. However, this difficult environment, especially after the recent sharp drop in stock prices, seems vulnerable.

“Are the risks too great? Only time will tell,” said Peterson.

Disturbing Story

The experience of Japan, which struggles with two lost decades of economic stagnation, is a disturbing story. Like many cities now in Europe, Tokyo experienced a strong surge in real estate and art prices in the early 1990s.

The sudden tightening of investment rules in real estate decided by the Japanese government led to a sharp decline in residential property prices, dragging down the art market as well. The subsequent lowering of interest rates in Japan, which were around zero in 2000, failed to revive the economy.

During nearly 20 years of deflation, consumers there postponed spending, believing that prices would continue to fall. The country’s debt has thus become nearly double the size of the economy.

This is precisely the fate that the European Central Bank (ECB) wants to avoid. The main tools they want to use to achieve this, however, include maintaining low interest rates.

In Switzerland, negative interest rates, which the central bank charges banks for holding their money, have been passed on to some clients, who are forced to pay for holding cash deposits.

Some, however, prefer to keep money under their mattresses. The money held at home or in safes in the Eurozone has exceeded €1 trillion, mostly in €500 banknotes.

“It has become clear to everyone that we have negative interest rates that seem likely to persist for some time, and this affects investor preferences,” said Alfred Roelli, senior portfolio manager at Pictet, a Swiss bank that presents art and collectibles to its clients at special gatherings.

According to him, the low interest rate environment “forces investors to be more adventurous and open to new investment ideas.”

Robert Ketterer, who runs an auction house in Germany, said that low interest rates are good for business because they prompt those who say they cannot achieve returns on their savings to buy art.

“Owners, on the other hand, hesitate to sell because they do not know what to do with that money,” said Ketterer.