How should investors deal with falling interest rates?
Martynas Stankevicius, CEO of Röntgen
As interest rates started to fall in all debt markets last year, some Lithuanian investors continue to cling to the double-digit return expectation formed at the peak of Euribor. This greed can lead to increasingly risky investments and inevitable disappointment.
Despite the economic and geopolitical turbulence of last year, investors were even more active than the year before. In the crowdfunding market alone, we have returned to a situation where new projects on platforms are funded in half an hour in the second half of 2024. This reflects investors' confidence in the platforms, their belief in the apparent recovery of the housing market and their willingness to lock in higher interest rates before they fall to pre-pandemic levels.
The economy and the housing market are in many cases now being stimulated by central bank policies, i.e. lowering base rates and the resulting cheapening of borrowing. Alongside EURIBOR, interest rates are falling on deposits, bonds, crowdfunding or other private debt instruments. In other words, while at the peak of EURIBOR the markets were lending to businesses at 10-12%, now an identical quality project would be borrowing at 7.5% or 8%. This is part of the natural cyclicality of the economy, whereby as the yields on so-called "zero-risk" investments (e.g. deposits or sovereign debt) fall, so do the yields offered by other investment instruments.
But not all investors understand this, especially those who discovered investing several years ago. They have usually not seen the full investment cycle and are under the impression that you can always earn 10-12% annual interest. In fact, it is certainly always possible to be promised 10-12%, but these promises are not always equally credible. In today's market, as "zero-risk" returns decline, such a high expectation implies a much higher level of risk, which investors often do not understand or know how to measure properly. So we have new, inexperienced investors for whom double-digit returns are not a "temporary emergency", but a standard to aspire to, or almost a given. These investors may start to take on more risk than they did a year and a half ago - more than they are actually comfortable with - without realising it themselves.
How is business reacting to these changes? Those with good quality collateral are enjoying the reduced cost of money and negotiating with more than one credit institution. But businesses with collateral that is not suitable for banks or low-risk platforms are luring investors with high return expectations with double-digit interest rates. This means that investors looking for higher returns also have to take on higher risks: secondary mortgages, vague quality collateral, questionable business plans or sometimes no collateral at all.
Such business behaviour is not illegal. After all, it is the investor who makes the final decision after assessing the opportunities and risks. The problem is that not all investors read or have the experience to objectively evaluate the descriptions of the investments on offer, or to find out why some projects offer 7% and others 16% annual interest. Failure to (re)assess the risks can then lead to serious disappointments. Such disappointments, however, will not happen immediately: opportunistic loans or bonds may not start to show their resilience, or lack thereof, until a year after the investment has been made, or even later. Last year, we have already seen the first high-profile stories of double-digit return bond failures in Lithuania, but perhaps not all optimistic loans have yet had time to show their results.
The reckless search for double-digit returns is not good for the Lithuanian financial market as a whole. Any potential scandal simply undermines confidence in responsible market participants and thus delays the maturity of the market, where investment is perceived by the vast majority as primarily stable, low-risk capital growth.
So existing, recent or contemplating investors must first accept that double-digit interest rates have been a rare visitor to the financial market in investments secured by mortgages. In a period of falling interest rates, it is above all worthwhile to be cautious, to resist greed and to be realistic about the risks of investment projects that offer high interest rates. For those who have accepted the end of the period of double-digit returns, this year will offer more than one sustainable investment opportunity.
How should investors deal with falling interest rates?
Martynas Stankevicius, CEO of Röntgen
As interest rates started to fall in all debt markets last year, some Lithuanian investors continue to cling to the double-digit return expectation formed at the peak of Euribor. This greed can lead to increasingly risky investments and inevitable disappointment.
Despite the economic and geopolitical turbulence of last year, investors were even more active than the year before. In the crowdfunding market alone, we have returned to a situation where new projects on platforms are funded in half an hour in the second half of 2024. This reflects investors' confidence in the platforms, their belief in the apparent recovery of the housing market and their willingness to lock in higher interest rates before they fall to pre-pandemic levels.
The economy and the housing market are in many cases now being stimulated by central bank policies, i.e. lowering base rates and the resulting cheapening of borrowing. Alongside EURIBOR, interest rates are falling on deposits, bonds, crowdfunding or other private debt instruments. In other words, while at the peak of EURIBOR the markets were lending to businesses at 10-12%, now an identical quality project would be borrowing at 7.5% or 8%. This is part of the natural cyclicality of the economy, whereby as the yields on so-called "zero-risk" investments (e.g. deposits or sovereign debt) fall, so do the yields offered by other investment instruments.
But not all investors understand this, especially those who discovered investing several years ago. They have usually not seen the full investment cycle and are under the impression that you can always earn 10-12% annual interest. In fact, it is certainly always possible to be promised 10-12%, but these promises are not always equally credible. In today's market, as "zero-risk" returns decline, such a high expectation implies a much higher level of risk, which investors often do not understand or know how to measure properly. So we have new, inexperienced investors for whom double-digit returns are not a "temporary emergency", but a standard to aspire to, or almost a given. These investors may start to take on more risk than they did a year and a half ago - more than they are actually comfortable with - without realising it themselves.
How is business reacting to these changes? Those with good quality collateral are enjoying the reduced cost of money and negotiating with more than one credit institution. But businesses with collateral that is not suitable for banks or low-risk platforms are luring investors with high return expectations with double-digit interest rates. This means that investors looking for higher returns also have to take on higher risks: secondary mortgages, vague quality collateral, questionable business plans or sometimes no collateral at all.
Such business behaviour is not illegal. After all, it is the investor who makes the final decision after assessing the opportunities and risks. The problem is that not all investors read or have the experience to objectively evaluate the descriptions of the investments on offer, or to find out why some projects offer 7% and others 16% annual interest. Failure to (re)assess the risks can then lead to serious disappointments. Such disappointments, however, will not happen immediately: opportunistic loans or bonds may not start to show their resilience, or lack thereof, until a year after the investment has been made, or even later. Last year, we have already seen the first high-profile stories of double-digit return bond failures in Lithuania, but perhaps not all optimistic loans have yet had time to show their results.
The reckless search for double-digit returns is not good for the Lithuanian financial market as a whole. Any potential scandal simply undermines confidence in responsible market participants and thus delays the maturity of the market, where investment is perceived by the vast majority as primarily stable, low-risk capital growth.
So existing, recent or contemplating investors must first accept that double-digit interest rates have been a rare visitor to the financial market in investments secured by mortgages. In a period of falling interest rates, it is above all worthwhile to be cautious, to resist greed and to be realistic about the risks of investment projects that offer high interest rates. For those who have accepted the end of the period of double-digit returns, this year will offer more than one sustainable investment opportunity.
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"Trečia diena" UAB, which operates the Röntgen platform, is a licensed crowdfunding platform. The platform is governed by the EU Crowdfunding Regulation and is supervised by the Bank of Lithuania in accordance with the law.