Negative interest rates are here to stay


November has been a very good month in that several pharma companies have been able to verify in clinical phase 3 clinical trials that they have a vaccine almost ready for distribution. This is particularly good news for all of us. However, it does not change the fact that the economy has taken a severe hit that will take years to overcome.

Macroeconomic outlook and monetary implications

In the spring of 2020, we wrote in our Newsletter that we would have to see GDP figures for the third quarter before assessing the likely impact on the economy. The preliminary figures from Eurostat are now available (see Figure 1, below).

Figure 1: GDP real growth rates compared with same quarter

of the previous year (source: Eurostat)

As widely expected, the second quarter of 2020 was the worst quarter ever recorded for several countries.

Many economists had hoped for a “V”-shaped recovery that would swiftly return GDP figures to previous levels.

Unfortunately, this has not been the case and the “recovery” leaves the EU economic growth rate around 4% lower than Q3 2019. Moreover, it should be noted that these numbers include perhaps the largest fiscal stimulation ever seen in the European economies.

With Europe now hit by the second wave of the COVID-19 pandemic, and many countries in semi-lockdown, it is obvious that we are going to see another decline in economic activity, probably to a level where GDP in real terms is 6%-8% below the level of Q4 2019.

With real GDP significantly lagging its potential development, and high unemployment, low inflation and governments running large deficits in order to stimulate European economies, it is almost impossible to envision a scenario in which the ECB would raise interest rate over the next 2-3 years.

Impact on returns

Macroeconomic and monetary conditions have, of course, an impact on the expected returns for different assets classes.

Table 1 Danish Council for Return Expectations 5-year forecast

According to the Danish Council for Return Expectations, government, mortgage and investment-grade bonds will have a negative return in each of the coming 5 years, while global equities should return just over 5%. However, an investment in equities involves much more risk and volatility.

For those with savings in bank accounts, there is more unpleasant news. While most European banks have not yet applied them, Danish banks have begun charging negative interest rates of up to 0.6% per year. Looking ahead, it is likely that more and more European banks will follow suit for bank deposits above a certain level.

Implications for investment portfolios

Using the Danish Council for Return Expectations forecast, and data about portfolio distribution and annual costs from one of Denmark’s ten largest banks, estimated returns on a managed investment portfolio with a medium-risk profile are as follows:

Table 2 Return based on Danish Council forecast and a top-10 Danish bank's portfolio information

The expected total return for a portfolio of 25% equity and 75% bonds will give a small positive return of 0.65%. However, after costs, net return is actually -0.25%, only a fraction better than keeping the money in a deposit account with a negative interest rate.

Managed investment portfolio solutions containing government/investment-grade bonds are simply unattractive, and it would be far better to invest only a fraction of the total amount in equities and keep the rest on deposit.

However, many investors are already heavily invested in equities and are not keen to increase exposure. Such investors should therefore examine alternative asset classes in order to obtain greater diversification in their portfolio.

Gustav Jensen Tony Jønsson

Managing Director and Partner Partner

You can invest in alternative lending with Quantrom P2P Lending DAC by subscribing to our profit participation note on our website: or (Danish version) where more information for investors is also available.

About the Author

Gustav Jensen

Gustav is the managing director of Quantrom Limited and is living in near Brussels.

Economist from University of Copenhagen mainly working in finance and banking.