Referring to the historical performance of the United States, Europe and Japan, in the range of rapid decline in interest rates, the bond market has been slow for a long time, and deposit assets can also obtain stable returns; Stocks and real estate assets typically perform relatively dismal due to weak economic growth momentum. And like United States and Japan, this phase lasts for a longer period (at least 10 years). Equity assets and real estate are more of a "mapping" of economic fundamentals, and the key to their trend is to see whether the economy can stabilize and rebound. If low interest rates can be combined with expansionary fiscal policy to drive the economy to gradually stabilize, the stock market and real estate are also expected to outperform other assets.
Japan Asset price performance in the era of low interest rates: Treasury bonds> exchange rate > prices> deposits> stock indexes> house prices. During the period, the scale of bonds expanded, stocks fell first and then rose, and real estate fell.
European Asset Price Performance: Stocks> Real Estate> Deposits≈ Bonds≈ Prices> Exchange Rates. Different economies within the euro area are differentiated: Germany, as the "locomotive" of the euro area, has a bright performance in stock indexes & housing prices; France's economy is relatively stable, stock indexes are better, house prices & bonds slightly outperform inflation; Italy is at the "tail of the crane" in the eurozone, with equity indices underperforming and bond returns impressive.
Residents: Japan and Europe diverge, Japan plus cash, Europe plus equity. The proportion of financial assets of Japan residents has risen, the proportion of cash & insurance has increased under risk aversion, the proportion of equity assets has declined rapidly at the beginning of the two crises, and the proportion of bond allocation has continued to decline throughout the era of low interest rates. The proportion of residents' assets/nominal GDP has continued to rise since 2012, of which the proportion of equity investment has increased significantly, bonds have declined, and cash has basically remained flat.
Banks: The demand for physical financing is weak, loans are generally reduced, cash is increased, and Japan expands overseas. Against the backdrop of Japan's balance sheet recession, banks have followed the trend, and the proportion of loans has continued to fall from more than 60% in the 90s to 42% in 21, while the ratio of cash and deposits has increased significantly since 2012. The proportion of bonds increased first and then decreased, and interest rates fell sharply, and the main allocation window in the early stage; Both asset allocation and lending businesses have extended overseas. In Europe, the proportion of bank loans fell from 39% in 2012 to 32% in 21, while the proportion of money and deposits increased in the same period, and the risk appetite of banks declined in the context of the weak recovery of the overall European economy.
United States situation
The situation in the era of low interest rates in the United States
In addition to the era of low interest rates after '08, the United States also experienced a wave of low interest rate cycles in the 30s of the last century. Referring to the interest rate on short-term Treasury bills, which peaked in 1929 (5.1%), fell below 0.5% in 1933 and remained so until 1947. Compared to the low interest rate cycle after 2008 (which began in 2014), it lasted significantly longer; During this period, the United States also experienced a severe recession and deflation.
The situation in the era of low interest rates in the United States
Specifically, in 1929, the United States interest rate hike punctured the asset bubble, and the stock market fell sharply to kick off the recession. In order to save the economy and the asset crisis, the Fed lowered the discount rate continuously from 1930 onwards. However, due to the constraints of the gold standard, the Fed's loose monetary policy has been repeated during this period. It was not until 1933 that the Roosevelt administration abandoned the gold standard and implemented a loose monetary policy, coupled with an expansionary fiscal policy, that the economy rebounded slightly.
This round of low interest rates was continued by the second recession in 1937 and the outbreak of World War II in 1939. In 1942, in order to cooperate with the financing of the United States Treasury during World War II, the Federal Reserve began to implement the YCC policy, setting the yield targets for 3M Treasury bills and Treasury bonds over 10 years to 0.375% and 2.5%, respectively. It wasn't until 1947 that the Fed began phasing out the YCC policy, ending a long period of low interest rates.
United States performance of property in the era of low interest rates
United States the low interest rate range of the 20s and 30s, compare the yields on major asset categories: house prices (including rents> bonds> stocks> gold > prices> house prices (excluding rents). From 1929 until the end of World War II in 1945, all assets achieved positive returns, except for house prices excluding rent. However, the rapid rise in the stock and house price (including rent) index mainly began in 1942, mainly because the United States was greatly stimulated by monetary and fiscal policy during World War II, and economic employment continued to recover.
Asset performance in the era of low interest rates in the United States
Before 1942, bonds and gold were the main beneficiaries of the event. The government bond index also benefited from the decline in market interest rate volatility (4.6% annualized from 1929 to 1941); The rise in the gold price was mainly due to the abandonment of the gold standard by the United States in 1933, which raised the gold price from $20.67 to $35 per ounce.
Industry performance in the era of low interest rates in the United States
In the United States industry performance from 1929 to 1933, only the tobacco industry maintained positive returns. In addition, the decline in daily necessities such as clothing, agriculture, food, crude oil and commodities was relatively small. The larger declines include real estate, construction, electronic equipment, electrical equipment, entertainment, finance, etc., which generally fell by more than 80%.
The situation in Europe
The situation in the era of low interest rates in Europe
Interest rates in the eurozone began to fall in 2008. In 2008, the subprime mortgage crisis in the United States spread to the global financial crisis, which severely affected the eurozone economy. In 2009, real GDP growth in the eurozone turned negative to -4.4%. As a result, from October 2008 to May 2009, the European Central Bank cut the benchmark interest rate by a total of 325bp for seven consecutive times, from 4.25% to 1.0%, helping the European economy gradually recover from the crisis.
However, with the advent of the European debt crisis, the second cycle of rapid interest rate cuts resumed in late 2011 and lasted until June 2014, when the European Central Bank lowered the deposit facility rate to -0.1%, officially entering the era of "negative interest rates".
The situation in the era of low interest rates in Europe
Similarly, after 2008, due to the decline in natural interest rates due to the slowdown in potential growth, the monetary policy of the eurozone has also been "passive" to maintain low interest rates for a long time, and even entered the era of negative interest rates in 2014. In terms of economic growth, the long-term low interest rate environment has not led to a rapid recovery of the eurozone economy. From 2008 to 2021, the average real growth rate in the eurozone was 0.71%, down from 2.33% in 1997-2007.
Asset performance in Europe in the era of low interest rates
Throughout the low interest rate cycle in the eurozone, the yields on major asset classes have emerged: bonds> stocks> prices> house prices> deposits> exchange rates. Starting at the end of 2007, all assets except the euro against the US dollar ended up with positive growth in 2019. However, the average house price and deposit income have long underperformed the local CPI. In terms of price fluctuations, the volatility of eurozone stock indices and exchange rates is also relatively high.
Asset performance in Europe in the era of low interest rates
During the period of rapid decline in interest rates (2008-2010), bond assets in the eurozone led the way (6.3% annualized). Deposit-like assets also had stable returns, while equity assets saw the biggest decline. However, since the second cycle of interest rate cuts in the eurozone, equities have continued to outperform other major asset classes.
Although the 2011 European debt crisis triggered a sharp correction in the stock market, the eurozone index rebounded quickly and recovered its previous decline from the second half of '12 as corporate earnings recovered. From 2011 to 2019, the annualized return of the Eurozone STOXX50 Index reached 7.2%. In contrast, yields on bonds and deposits have continued to fall.
Sector performance in Europe in the era of low interest rates
In Europe, during the period of downward interest rates (2008-2010), only durable goods and clothing, business services, and food, tobacco and alcohol industries rose slightly, while software, retail, and pharmaceuticals fell relatively slightly, and the industries that were more affected were mainly in the fields of hard technology, finance, and real estate.
From 2011 to 2013, despite the impact of the European debt crisis on the stock market, the semiconductor industry index was still able to achieve a cumulative return of 84%, leading other sectors. This is followed by software development, retail, pharmaceuticals, insurance, and other industries. As the "world's semiconductor research center", Europe is a global leader in high-end R&D and manufacturing.
Residents' asset allocation in the era of low interest rates in Europe
Risk appetite was high, the proportion of equity investment increased, bonds declined, and cash was basically flat. The share of equities and funds rose most significantly in the era of low interest rates, rising from 23% at the beginning of 2012 to 30.6% at the end of '21, an increase of 7.6 pct； The share of cash and bonds both declined, from 35.2% to 33.3% and bonds from 7.5% to 7%.
As the impact of the crisis initially weakened, risk appetite showed a significant upward trend, which is also reflected in the internal allocation structure of bonds, with the proportion of short-term bonds accounting for about 95% for a long time, and there has been no significant increase in duration in the era of low interest rates.
