Dr George Theocharides is an Associate Professor of Finance at the Cyprus International Institute of Management (CIIM) and
Director of Goal Portfolios Insurance Advisers.
As most of us are aware, a major trend that appeared in global markets in recent times is the establishment of a low or even negative interest rate environment. The reasons of course behind this uncomfortable trend have to do with insufficient rates of growth for the global economy as well as low inflation levels. This situation is here to stay for some time (unless inflation picks up rather drastically) and has important implications. One of them is the low (or even negative) return provided by fixed-income securities, including bank deposits. This creates problems especially in countries such as Cyprus, where the availability of other saving/investment opportunities is rather limited.
The situation right now is as follows – deposit rates offered by Cypriot banks to retail investors is very low and close to zero. It does not even cover for the inflation rate, i.e. the real rate is negative. For corporate clients, it’s even worse. Some banks have already started charging a negative nominal rate to those clients. If you couple this with the fact that, despite the considerable improvement in the banking sector, the banks still have a junk rating and the deposits are not guaranteed above €100k, then the situation becomes really problematic. What are then the alternatives? One popular alternative is investment in real estate. But this option has drawbacks as well. Investment in real estate in general suffers from illiquidity and this problem becomes more important at times when you want to exit from the investment. Furthermore, you ran the risk of investing in a “bubble”, i.e. inflated prices that do not reflect the true value. Another alternative is investment through the Cyprus stock exchange. But this is also problematic. There are very few companies to invest plus it also suffers from illiquidity.
That is why Cypriots (especially the retail investors) need better access to the global capital markets. There are plenty of opportunities to invest there, whether it’s through stock markets, bond markets (governments or corporates), alternative investments (real estate/private equity/hedge funds, or commodities), or mutual funds (that can combine various asset classes across global markets). Contrary to the fixed-income market, the performance of the main stock markets for 2019 was exceptional – the main US stock indices produced returns of 29% (S&P 500), 35% (NASDAQ) and 22% (Dow Jones). The global bull run saw the Stoxx Europe 600 jump 23% during the year. China's Shanghai Composite rose 22%, and Japan's Nikkei 225 gained 18%. Even safe-haven assets jumped in 2019, with gold leaping 19%. A point to note is that investing in funds provides the benefits of diversification which reduces the risk. Furthermore, investment abroad has the added benefit of international diversification. Of course, any investment carries risks and the level of return that you should expect depends on that. Thus it’s essential (especially for retail investors) to seek the assistance of experienced professionals that will evaluate the risk profile of the client and recommend suitable products. I should note that in general, investing in global markets offers the liquidity that is absent in Cyprus and should be considered as an intermediate to long-term investment. Short-term investments can suffer from short-term volatility and this can be avoided by investing for a longer horizon.
At the moment, these opportunities are not readily available to the retail investor. Some banks (and some Cyprus investment firms) have just recently started to promote these through their private banking/wealth management divisions in an effort to reduce the excessive liquidity in deposits that is costly for them. But more is needed and new players should join the market. The more organizations offering these services the better for the investors – healthy competition can provide better investment opportunities to the investors at a lower cost.