The COVID-19 pandemic has brought fundamental changes to everything from daily routine to the course of macroeconomic development. How would you choose to deal with them? Traditional wisdom leads us to look through history for ways to adapt.
"History repeats itself," the saying goes, but what if reality is like never before? In this article, I would like to discuss whether there has been throughout humanity such a level of interest rate as today's, or whether it is so extraordinary that there is no experience to learn from.
Low-interest rate not seen in 5,000 years
I am quoting a study conducted by BlackRock in 2019 for your reference. This research (see picture) attempts to collect and analyse historical data spanning 5,000 years－starting from 3000 BC, through the Babylonian Dynasty and the Roman Empire, until 2019. Take a close look, and you will find that the low-interest rates of our time, especially short-term ones, are indeed at a level unmatched in the past.
If you are a history bookworm, you might notice similar situations in the 1950s as the world was being rebuilt after World War II. Still, rates have gradually risen to curb inflation soon after the US dollar broke away from the gold standard in the 1970s.
Post-pandemic new normal: "earn-and-save" no longer works
After the popping of the Tech Bubble in 2000 and the 2008 financial crisis, drastic rate cuts and quantitative easing have come in handy in stimulating the economy. It is worth noting that after the pandemic broke out in 2020, central banks of various countries were compelled to take action and resuscitate the almost paralysed economy with a bunch of financial policies. After such heavy doses, it is almost certain the compound interest effect of cash savings will be highly inefficient.
In the new normal of the pandemic, it’s obvious how “earn-and-save” – the old way of accumulating wealth would end up.
You may want to prove your wit in investment and leverage other assets to counter inflation or even gain capital. The truth is the colossal volatility endured in all asset classes such as gold, equity or even cryptocurrencies thanks to the ultra-low interest rate environment may eat into your wealth, not preserve it.
The good news is, insurance groups with solid foundations have considered the above factors when developing the new generation of long-term wealth management products, balancing risks with prudence while meeting customer expectations. In particular, some savings plans with growth potential can make the most of time by maximising compound interest. They help lay a sound financial foundation for your family and facilitate the inheritance of wealth.
The above content is reviewed by Mr Daniel Lau - Head of Investment Proposition of AXA Hong Kong and Macau
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