It's tempting to think this is a reason to dump cash and buy shares. Such a temptation should be resisted. History shows that low and negative real interest rates are often associated with bad returns on equities.
For example, since 1870 there have been 36 years when real interest rates (defined as bank rate in the previous year minus current inflation) have been negative. The average real return on equities in these 36 years was 2 per cent. In the 36 years in which real interest rates were highest, real equity returns averaged 11.6 per cent. Across all years since 1870, the correlation between real interest rates and real equity returns has been positive, at 0.24.
Below-average real interest rates, then, are usually associated with below-average equity returns. For example, negative real rates in the early 1950s and 1970s were accompanied by falling share prices, while high real rates in the 1920s and 1980s saw bull markets.
History, therefore, is reasonably clear. Negative real interest rates are not a good reason to pile into shares.
One reason for this lies with inflation. Historically, real interest rates have been most negative when inflation has been high, and inflation is more often than not bad for shares (perhaps because investors are prone to money illusion).
This implies that if you are one of those 'inflationistas' who expects loose monetary policy to eventually unleash high inflation, then you should avoid equities, as well as cash and gilts.
However, inflation is not the whole story. Since 1870, the correlation between annual inflation and annual real equity returns has only been minus 0.19. There's also a slight positive correlation (0.07 between nominal interest rates and annual real equity returns. This tells us that, for a given inflation rate, lower interest rates are - if anything - bad for equities.
To see why this should be, just ask: in what circumstances are real interest rates low? The answer is: times of weak economic activity when people are reluctant to borrow, spend or invest. But these will also be times when shares are likely to do badly.
All this might seem counter-intuitive. Intuition tells us that loose monetary policy should unleash some kind of boom - either real or speculative - which should boost share prices. Herein, perhaps, lies the problem. Investors tend to anticipate such a boom. And in doing so, they bid share prices up to levels from which they are vulnerable to disappointment, with the result that negative real rates see shares do badly.
Yes, there have been times when negative real rates have been accompanied by big rises in share prices, such as 1919, 1975 and 2009. But these rises all followed big falls.
Now, this doesn't mean you should necessarily stay in cash. Although shares do worse than usual when interest rates are lower than usual, they still - on average - outperform cash in such times. But this is because shares usually do better than cash anyway. It's not because shares do unusually well at times of low rates.
The message here is depressing. The prospect of negative real rates is no reason to expect good returns on equities. It is instead a reason to expect low returns on financial assets generally. If you want to increase your wealth, then, you must simply save more. Sadly, though, the more we all try to do this, the likelier it is that rates will stay low for a long time.
