Many view the plummeting interest rates and resultant lower cost of debt in a positive light, but it spells bad news for investors, writes financial advisor Pieter Willem Moolman.
Rian le Roux, chief economist at Old Mutual Investments, recently aired his opinions on the above trend.
According to him, the recent interest rate cut to 9.5% (REPO rate 6%) was widely expected and already factored into prices. There was therefore no surprise reaction in the capital markets following the announcement.
Speculation of a further rate cut might please some, but others will be biting the bullet to survive on the lower income.
The factors that are making the low rates possible are the continued sharp decline in inflation, the resilience of the rand and slow economic recovery. With inflationary pressures benign around the world, South Africa’s consumer inflation again fell sharply in July.
Virtually no food inflation and the still-strong rand continue to depress inflation in tradable goods such as footwear, clothing, furniture, appliances and vehicles. At the same time, the rand has remained strong against key currencies as our relatively high interest rates, falling inflation and low government debt levels have continued to attract foreign buyers to government bonds.
Le Roux expects local rates to remain low for the foreseeable future provided global interest rates remain low. The impact on investors is significant, to say the least.
With yields from cash and money market investments already near 10-year lows (around 7%), investors can expect returns to fall even further. This is because the South African Reserve Bank’s lower repo rate directly impacts the interest rates offered by bank deposits, money market funds and other types of investments that provide a regular income.
The cumulative decline in the interest rates since December 2008 means that an investor with R500 000 would have to handle a drop in income from R5 000 to R2 708 per month – a 45% decrease in income!
We see daily how employees fight for increases and where unions threaten with strikes if demands are not met. They want to beat inflation in order not to compromise on standard of living.
Unfortunately people who are dependent on investment income are left with no choice and no “employer” with whom to negotiate.
Cash will always be an important part of an investor’s portfolio. Conservative investors who remain largely invested in cash will however need to save and invest more in order to maintain or grow their income.
Those who can tolerate a somewhat higher level of risk should consider an income fund that aims to achieve both capital protection and a growing income by investing across a range of assets like cash, bonds and even limited amounts of property and equities.
Most unit trust funds offer a wide range of income funds, each with a risk profile and performance target to suit most investor needs. Talk to your financial advisor about these.