Introduction
On 5 September 2023, the Belgian government issued State notes offering a net rate of 2.81 %. Weary of the derisory returns on their savings accounts, more than half a million Belgians responded to the call, enabling the government to raise almost 22 billion euros. The popularity of the issue can be attributed not only to the attractive rate but also to a significant tax advantage: a reduced withholding tax rate of 15%, compared with the usual 30%.
As the deadline for these State notes approaches, questions are once again being asked about the effectiveness of this operation. Was it really a wise investment or simply a reaction to low interest rates and a marketing ploy by the government?
Background on the objectives and tax strategy of State notes
Before judging whether they were a good investment, it should be recognised that this initiative was seen as a response to a very real problem: the lack of profitability of savings accounts.
However, the question of the tax advantage granted to these State notes has raised criticism. Some observers felt that this tax reduction was unfair compared with borrowers who were obliged to withhold 30%. At the time, many Belgian banks spoke of genuine unfair competition.
A legitimate question arises: wouldn't this tax advantage have been more useful if it had been directed towards innovative companies likely to stimulate the national economy, rather than supporting passive investment that goes straight into the state coffers?
Has the stated objective of State notes been achieved?
As we have already said, the main purpose of issuing these State notes was to boost banking competition, by forcing Belgian banks to raise the rates on their savings accounts, which often stagnate at around 1%.
Unfortunately, this objective does not seem to have been achieved. The banks have not increased their savings rates, but they are nevertheless preparing to snatch up investors' funds when the State notes mature, by offering alternatives such as term accounts, savings bonds and life insurance. These offers are often limited to funds derived from State notes, and are more a marketing strategy than a step towards the customer.
State notes: a good plan for investors?
But then, were the September 2023 government bonds really a good investment opportunity? To answer this question, let's look at two investor profiles: Uncle Séraphin and Aunt Agathe.
Case study: Uncle Séraphin vs Tante Agathe
On 4 September 2023, Uncle Séraphin invested €20,000 in one-year government bonds, attracted by the security of this investment and the simplicity of the approach. For her part, Aunt Agathe, who is more financially savvy and a little reckless, chose to invest the same amount in an ETF replicating the S&P 500. (It's important to note that the single investment of €20,000 was chosen to simplify the example. Remember that time diversification remains a key investment strategy). At the end of the year, it was time to take stock.
Graph 1 - Performance of €20,000 invested over one year in September 2023, taking into account the effect of inflation over the same period
As shown on the Graph 1Despite his initial hopes, Uncle Séraphin discovered that he hadn't managed to beat inflation, but he took comfort in the fact that his losses were limited to €150. This is certainly a much better result than if he had left his money in a Belgian savings account, where inflation would have eaten away more than €550.
Aunt Agathe recorded a handsome capital gain of €3,778, including only transaction costs and the impact of inflation (because, remember, capital gains are tax-exempt, provided they can be considered as part of the normal management of private assets), thanks to the robust performance of the financial markets in 2023. His decision to invest in an ETF replicating the S&P 500 index proved to be a wise one, enabling him not only to preserve his capital but also to grow it.
State notes: a good plan for investors?
Does this mean that Uncle Seraphim has been taken for a ride? Admittedly, he missed out on the substantial returns offered by the financial markets and gold this year, but he took account of his risk-averse investor profile. Especially as it's important to put returns into context.
The financial markets and gold have broken all records this year, but let's not forget that the annual performance of these assets is historically volatile. For example, if Aunt Agathe had invested her €20,000 in an S&P 500 ETF at the beginning of 2022 with a one-year time horizon, she would have recorded a loss of more than €600.
However, if he took the trouble to seek advice from experts or to educate himself in finance, Uncle Seraphim would discover that funds that replicate stock market indices are not to be shunned. In fact, over the long term, they offer an average annual return of around 10%. While it is crucial to remain aware of their volatility, this can be mitigated by effective asset diversification and appropriate time management.
Just take a look at the Table 1 to see for yourself: over the long term, a diversified portfolio (mimicking the S&P 500) offers much higher returns than government bonds and bills, and volatility can be kept under control. However, quartiles do not rule out extreme events, which is why it is important to diversify over time and invest regularly.
Table 1 - Statistical summary of €100 invested in different assets over different time horizons on a historical basis from 1970 to 2023
What about the new State notes?
The supposed safety of government bonds may suit those who prefer stability, but the results are disappointing because they do not even beat inflation. A diversified approach, supported by sound financial advice or personal training, can offer more attractive returns while balancing the risks. Too much focus on safety can mean missing out on great opportunities for growth.
At a time when the new government bonds are proving less attractive, with a net rate of 1.93%, and when the banks are bringing many products out of the broom cupboard, it is all the more pertinent to reflect on your investment strategy. This context could well be the ideal time to embark on an ambitious project. training and seek sound advice on how to manage your portfolio more effectively!
Sources
- Federal Debt Agency. New State notes to be issued on 16 September 2024. Accessed on 2 September at the following address: https://www.debtagency.be/nl/node/5580#:~:text=Le%20mercredi%204%20septembre%202024,%25)%20sur%20les%20comptes%20indiqués.
- BullionByPost. Gold price per gram 7 days in EUR. Accessed on 2 September at the following address: https://www.bullionbypost.fr/cours-de-lor/cours-de-lor-par-gramme/?gclid=Cj0KCQjwiuC2BhDSARIsALOVfBKHzA2HYefgp3ORgwwZBWp4LMHxtcNKmks3mRGndiS0xDTZLY0vxjQaAn0uEALw_wcB
- Damodaran, A. (2024). Historical Returns on Stocks, Bonds and Bills: 1928-2023. https://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html
Yahoo Finance. iShares Core S&P 500 ETF (IVV) Performance. Accessed on 2 September at the following address: https://fr.finance.yahoo.com/quote/IVV/performance/
