If you live in the Netherlands, there's a 99% chance this is costing you money
Geschreven door Koen The op 11 november 2019
If you live in the Netherlands there is a 99.6% probability that you have a bank account. And while we’re at it, there is a 100% ‘probability’ that you get something close to 0% interest on your savings account. The cruel reality is that if your money yields less than inflation, you’re actually losing money.
Inflation is currently 2.6% in the Netherlands. Truth be told, in the Netherlands, inflation is inflated (see what I did there?). Some one-off government actions (such as higher VAT) make the situation seem worse than it is. Still, the interest rate on savings accounts is, as in many other countries, much lower than inflation. Add to that the wealth tax and you’re basically screwed. Pardon my French.
You should not easily dismiss this. Getting no return on your money if inflation is, say, at 1.5%, means that your wealth is worth almost 10% less in seven years. We’re not even talking negative interest rates here!
As people are desperately looking to preserve their hard-earned money, there are several options to consider.
A seemingly obvious thing to do is to pay off your mortgage. But with rates so low, one can wonder if that’s the right thing to do. If your house is some kind of protection against inflation, then the expected price appreciation is more than what you pay on the interest on your mortgage.
Any accelerated payment on your mortgage is in fact a very illiquid, concentrated, investment in real estate. You won’t be able to use that money in the foreseeable future. If circumstances later in life demand you to come up with cash, you may need to increase your mortgage at interest rates that are considerably higher.
What about government bonds you ask? Well, if you’re into paying interest on your investment rather than receiving interest, by all means, go right ahead. The Dutch minister of finance gloated when he realized that he could borrow money for 30 years and each year get paid for doing so.
Savings Products from Banks
Now let’s look at your bank. Surely they will offer higher interest rates if you make a term deposit? The good news is, they do. The bad news is that it’s only by a small margin. At ABN AMRO you get 0.15% for a 10-year deposit. And by the way, you get 0% if you want to deposit more than EUR 10 million. But somehow, I don’t feel sorry for you if you’re one of those people ;).
A Difficult Choice
There seem no other ways about it. Either you decide to take the inflation hit with cash (which sometimes turns out to be the best strategy) or you increase your investment appetite and try to obtain higher yields. In case you go for the latter, then you need to make sure that you build an investment portfolio that is diversified over asset classes, sectors, regions, etc. The question is then: where in your portfolio should you increase risk and strive for higher yields?
You could have a closer look at the financial sector. Not a bad place to start if you are considering transferring some of your savings (tucked away at banks) into investments. The aforementioned 99.6% bank account penetration rate pretty much reflects the saturation in the financial sector in Europe.
European Financial Sector Struggles
On top of that, both population and GDP growth are low. It’s literally scraping for profit in the banking industry right now. And it’s not like it’s cheap to run a bank. High wages are common, and since the credit crisis, capital requirements make the whole lending business (i.e. the traditional banking business model) very expensive. Shareholders are merciless and demand a high return on their equity. Don’t blame them, in fact, quite a few of them are acting on your behalf as they are protecting your pension, savings, or attempting to keep your insurance policies affordable.
But the reality is that it forces banks to be highly leveraged. Those are just fancy words that form a nice way of saying: banks have a shitload of debt on their balance sheet and not as much equity capital against it. Another consequence is that banks are searching for profits in places they shouldn’t.
Traditional Banking is for Losers
As far as profitable business lines go in the financial world, traditional banking is for losers, and the top banks are setting up internal hedge funds and specializing in regulatory capital, invent products that they themselves don’t always understand, among other things. And of course, all of this is in the search of profit. One can wonder whether one would like to invest in an over-regulated low-growth sector that is saturated with players lost in their ways.
An Attractive Frontier Market
There is an interesting part of the financial sector that you may have overlooked though. In emerging and frontier markets, the financial sector is – literally and figuratively – in a totally different place than European financial institutions. In Sub-Saharan Africa, the average age is 20 versus 42 in Europe. Only 25% of people have a bank account, while half of the SMEs are not able to realize their financing needs. The banks in these regions don’t have to jump through mysterious hoops to realize profits. They just have to be good at what bankers are supposed to do: borrow from individuals and lend to SMEs.
These banks find themselves in a region with a GDP growth that’s twice that of some European countries and strong population growth. They are most of the time regulated but not over-regulated and don’t need to be ‘highly leveraged’. Money is not artificially cheap. Of course, there are significant risks as well. High inflation and political risks to name a few.
Altogether interest rates are much higher for borrowers as the financial sector is still in its infancy. But that’s also where part of the opportunity lies. Especially in East Africa, the financial sector is very dynamic, and a lot of things are happening. Mobile banking is the standard and not some incremental "me-too strategy". Some are developing algorithmic SME lending tools while others – usually smaller institutions – are simply moving away from manual paperwork. The upside is huge.
How to Fight Inflation with Your Investments
As you are looking into ways to prevent your money from being eaten away by inflation and taxes, you may want to consider investing in the debt of financial institutions in emerging and frontier markets. It strengthens the regional diversification of your investment portfolio, and interest rates are typically between 2-4%. Let’s be clear, it’s high risk. But it can also be highly rewarding. Not only in terms of yield but especially in terms of positive impact. A strong financial sector leads to financial inclusion and a resilient SME sector. SMEs are the true engine of any economy. By investing in financial institutions you’re helping the local economy to create jobs.
Fight poverty as you fight against inflation. Why not? The benefits are there, ready to be taken advantage of. Will you?