Reasons for low-yield environment

Skyline of the Central Business District on Aug 15, 2016.
Skyline of the Central Business District on Aug 15, 2016. ST PHOTO: LIM YAOHUI

SLOWING GLOBAL GROWTH

Although fears around a global recession have receded, global growth remains low. Citibank projects global gross domestic product growth of 2.4 per cent this year, which is about 0.6 percentage point below the historical mean. Persistent slow growth creates a vicious circle where lower demand and investment further depresses output, said Mr Zal Devitre of Citibank.

LOW INFLATION AND INTEREST RATES

Lower inflation and lower commodity prices are fuelling lower interest rate policies as seen in Japan and Europe, noted Mr Marc Lansonneur of DBS.

Low growth and low inflation, resulting in low interest rates, are factors that will weigh on investment returns, said Mr Vasu Menon of OCBC Bank. "Global economic growth is unlikely to return to the heyday before the 2008/ 2009 global financial crisis. We could see several years of low growth in the future, as many parts of the world deal with unfavourable demographics like ageing populations and declining birth rates, which could limit growth prospects."

POLITICAL UNCERTAINTY

Geopolitical uncertainty is elevated and has been so for the past few years. High levels of uncertainty cause investors and businesses to hold off making investments, which in turn leads to slower growth and poorer market performance.

An example is the upcoming US presidential election which Citibank considers as a major - but not the only - contributor to global uncertainty. The bank currently projects a victory for Democrat Hillary Clinton.

"A Trump victory could in our view trigger a US and global slowdown," said Mr Devitre.

ECONOMIC AND MONETARY POLICIES

Economic uncertainty, especially as it relates to policies of central banks, is keeping investors and economists around the world guessing. For instance, Bank of Japan and the European Central Bank have both introduced negative interest rates to their banking sectors and are buying massive amounts of fixed income and now equities. Both policies are leading to unintended consequences and market distortions, added Mr Devitre.

Meanwhile, global monetary policies over the last seven years have been extremely accommodative, which has pushed up prices across all asset classes, with some of the world's main indexes - Dow Jones Industrial Average Index and Nasdaq Composite Index - now at record highs.

Lorna Tan

A version of this article appeared in the print edition of The Sunday Times on September 11, 2016, with the headline 'Reasons for low-yield environment'. Print Edition | Subscribe