Where can European investors find an alternative to cash?
You may or may not be aware but the European Central bank has very recently cut interest rates, only marginally this time to 0.15%. This move has been implemented in a bid to provide stimulus to business-lending. Meanwhile the ECB have also reduced deposit rates for banks by -0.1%, which means that effectively banks will have to pay money to the ECP to keep their money as a deposit! In theory, this should encourage most banks to lend more money in order to stimulate the economy.
However, in reality, this is a very small change which may have little effect in countering the threat of deflation or in actually encouraging banks to invest in business.
So, what does this mean for investors? Or those of you with cash in the bank? Well, to be frank, it’s not good news!. Realistically, banks can now borrow money from the ECB at the rate of just 0.15% instead of providing their customers with interest on the cash which they have invested.
However all is not lost, and today there are several low risk alternatives for those wishing to invest. Equity funds have been performing steadily and in fact European stocks are up 7% this year. Some funds can include capital-guaranteed elements today and, in particular, corporate bond funds have been providing stable returns for some time, whilst performing better than European interest rates without similar equity or treasury bond risk.
In reality, money in the bank today is losing ground against inflation (albeit a low headline inflation rate in Europe) and investors need to consider a strategy that realises that taking on some additional risk is required in order to simply earn a return, or some growth, from their investments.