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Bad news for savers: the crisis is over

The credit crisis appears to have run its course, a fact which is good news for the economy but bad news for savers. Interest rates on saving accounts and deposits are plummeting, sometimes almost halving in a matter of months. Confidence in the banking system has returned and the high rates which had to be paid to attract savers are a thing of the past.

This poses a problem for savers. Last year they could park there money at rates which were much higher than those on short dated government bonds, in the happy knowledge that most governments supplied a guarantee of up to 100,000 euro’s. Now, the guarantee is still there, but the interest rate is not. And, let’s face it: in a world with no inflation, risk free rates should be low. Last year’s rates were a crisis related gift package, a rare case of policy generosity.

Many savers will only be confronted with this new reality in the second half of this year, when their one-year deposits have to be renewed. Part of these investors will renew the deposits at the lower rates. After all, a few percent return is still reasonable as long as inflation is dead. Another part will have difficulty which such a ‘Japanese’ mindset. They will start looking for better opportunities. The good news is that equities and corporate bonds still offer attractive yields, the bad news is that these yields are attractive for a reason.

Capital markets are quite efficient and investors are discounting the fact that the uncertainty about the global economic outlook is unusually high. The optimists expect a nice rebound in 2010 and especially 2011, driven by cheap money and emerging markets. However, the likelihood of a slow, drawn-out recovery with very low or no inflation is probably equally high. In that scenario the corporate revenue growth is likely to remain muted and pricing power limited, giving very little room for profit growth. Since both outcomes are possible, one should not bet “the house” on one single scenario. For those who want to enhance their income by transferring money from saving accounts to high yield investments, the yields on bonds and equities of good quality companies still look attractive. Surprisingly, in some European sectors, like oil, utilities, telecom and healthcare, dividend yields range from 5 to 7%, as high as the bond yields from those same companies. This is a historical aberration, since dividend yields tend to be clearly lower than bond yields. After all, dividends are supposed to grow over time, whilst the coupon on a bond does not change.

So why are these dividend yields so high? Do investors think that the companies will not be able to sustain these dividend levels in the future? We think they will be able to sustain these levels, given the fact that these are companies with decent balance sheets in non-cyclical sectors. A more plausible explanation is that investors do not see much potential for these companies to increase their dividends in the coming years, as they may be confronted with a lacklustre economy.

So for those who are looking for a decent investment income, good quality corporate bonds and high dividend equities still offer an attractive alternative for low yielding saving accounts. Even so, one has to realise that after the recent rally corporate bonds and equities are not mispriced anymore, and that their high yields do therefore reflect investor expectations for a difficult economic environment with an ongoing bumpy ride for risky assets.