The Great Rift Valley in Eastern Kenya provides the setting for the world’s greatest wildlife spectacle – the 1.5 million wildebeest migration. From the vast Serengeti plains to the hills of Kenya’s Masai Mara over 1.4 million wildebeest and 200,000 zebra and gazelle, relentlessly tracked by Africa’s great predators, migrate in a clockwise fashion over 1,800 miles each year in search of rain ripened grass.
Since 2008, the investment world has been in turmoil and we have witnessed a similar migration of investors seeking a return on their money. For high risk investors, there has been a significant recovery in equities but for cautious investors it has been a different story.
Initially, banks, in an effort to stabilise their balance sheets, offered depositors rates of up to 5% for placing money on deposit for 5 years. In order to stimulate the economy, central banks engaged in ‘quantitative easing’ thereby boosting equities and forcing down the yields on bonds, allowing governments and corporations to borrow at very low interest rates. As economic conditions stabilised, interest rates fell to zero or below.
This has affected lower risk investors, such as pensioners, more than higher risks investors. Historically, lower risk investors invest in cash deposits paying an interest rate of 3% + and Government and Corporate bonds with yields in normal times of 4% +. These are considered the safer options for low risk investors.
Real Estate with yields of 5% and dividend paying equities at 6% pa are also good sources of yield but both carry a much higher risk to capital.
As cash yields fell there was a migration of investors from cash to bonds; this helped push down bond yields, causing a migration from bonds to property and equities. In turn, this has caused dividend yield on equities to fall to about 2%. Unfortunately, this rate is not sufficient to compensate investors for the risks they are taking with their capital.
With equities at all-time highs and dividend yields falling, the worry is many low risk investors will continue to remain invested just because they have nowhere else to go.