When money is cheaper to obtain and costlier to hold for institutions, capital market asset prices rise. Ultra-supportive central bank asset purchase programmes have supported the sovereign bond rally a good deal already, but expectations of further action mean some bonds, for example, peripheral eurozone (Spanish, Italian and Irish) bonds could catch up with their core (French and German) counterparts. Equity markets in negative rate regions, particularly the eurozone, should benefit from the economic growth that loose monetary policy supports. More money in the eurozone economy (M1) has a close relationship to gross domestic product growth in the region. Given the 2016 sell off, eurozone equities are near pre-ECB quantitative easing levels, which means there is some value to be found in companies with solid fundamentals.
There is still more to come in the world of negative interest rates. Since a small portion of total assets are actually charged these rates at the moment, central banks who want to go even lower have some scope to do so. As investors, we need to monitor if and when the negative interest rate will start affecting corporate profitability and consumer savings accounts. Until then, supportive central banks should be a tailwind to these economies.
Nandini Ramakrishnan is global market strategist at JP Morgan Asset Management