Investment solutions during low interest rates era

Updated: Dec 16, 2019

Central banks both in Europe and in the U.S. continue to conduct their expansionary monetary policy, which means that interest rates are going to be kept at very low levels also looking forward. These are good news for the borrowers as loans are not expected to become more expensive. On the other hand, it is not possible to get decent returns on the invested cash in this environment: deposit rates just marginally exceed zero percent level, while government bond yields are virtually 0%. If one also adds the inflation rate, it becomes clear that the cash capital is losing its value.

Low interest rates are a true headache for all investors worldwide. However, it is possible to find solutions in the current situation. As such, one of the most attractive alternatives is an investment in the companies with high dividend yield and limited share price volatility. Baltic companies are very generous in terms of dividend payout: average dividend yield for Baltic market is 4.8%, which compares with just 1.6% in the U.S. and 3% in Europe. Lithuanian telecom Telia, Estonian retailer Tallinna Kaubamaja, Port of Tallinn – these are just few examples of attractive dividend payers with yields over 6.5%.

Other possibility for investors to consider is purchase of high-yield corporate bonds. These are the bonds originating from the issuer with riskier balance sheet, usually operating in capital intensive industries. Therefore, higher interest rates are paid to reward for the additional risk. On Nasdaq Baltic Stock Exchange, it is possible to find a number of attractive investment options – corporate bonds with yields of 6-8% per annum, which can help not only in beating the inflation, but also in capital appreciation.

When considering lucrative investment options, online peer-to-peer platforms should not be neglected. These fintech companies, which usually are more efficient in matching lenders and borrowers than traditional banks, offer 10-14% annual return in Baltics. Naturally, the risks associated with investments in such platforms should not be ignored - compared with equity and bond investments the operational history of online platforms is rather limited, which translates into low outlook visibility.

All of the mentioned investment solutions have their risks, which should be acknowledged when developing investment strategy for company’s cash allocation. However, when risks are properly accounted for, it is possible to build a well-balanced portfolio for idle cash in order to earn returns exceeding inflation rate.

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