The global financial crisis of 2008 and an unprecedented pandemic in 2020 put global markets in high distress. To prevent a recession and stimulate economic growth, central banks forced interest rates to historically low levels, as lower financing costs could encourage borrowing and investing.
Low-Interest rates persisted for more than a decade. Expectations of banks and insurers were shaped by authorities who made sure to signal that interest rates would remain low in a continuous effort to maintain stable economic growth. This inspired investment strategies that integrated a.o. more long-term illiquid assets chasing higher yields – “Yield Hunger Games!”
Naturally, rates could not stay at such levels forever.
A steady increase in inflation commenced in mid-2021 and accelerated throughout 2022. With the pandemic crisis shifting demand to goods (versus services) and affecting supply, governments and central banks easing the monetary effects of the pandemic, and the Russian invasion of Ukraine affecting energy supply and prices, prices for goods have been continuously increasing, impacting purchasing power.
High inflation in the Eurozone prompted the European Central Bank to raise interest rates in July 2022 by 25 basis points for the first time in 11 years, reaching cumulatively 200 basis points by November 2022. The Fed followed a similar pace in the United States.
This interest rates evolution from a long period of low (and even stagnant) interest rates to a new period of increasing rates has formed the following investment environment:
- For insurers – The investment model of insurance companies usually includes long-term liquid assets for covering future liabilities. In a long period of low rates, many insurers shifted their investment strategy to long-term illiquid assets to profit from higher yields, reducing flexibility in adjusting their investments according to new markets conditions.
- For banks – Low-interest rates eased debt financing, especially for long-term assets with low and stable rates, such as mortgages. Banks are now stuck with low-yield products. On the funding side, increasing rates create the necessity to calibrate products offering attractive yet competitive new products for investors.
- For individuals – Markets experiencing a steady growth, partly fuelled by cheap debt and easy equity financing, accelerated new businesses especially in the technological sector. Markets imploding at the start of the pandemic, resulted in affordable stock prices. Cash availability due to low consumption in the course of the pandemic, turned a large range of investors to the stock market. The tech industry, the majority of which sits in Silicon Valley, attracted a large share of investments, generating large volumes of cash in the recent years.