158 days of lockdown, we are down to 6th in the “polls” in the world of number of Corona cases, with 71 969 active (539 critical) and we have sadly lost 14 149 live. Placing the death rate at 2.26% of people who contract the virus dying.
By now we have possibly all known someone who has contracted the virus and sadly even died. The stories have been vast and mostly in my experience independent symptoms shown, from shortness of breath to muscle cramps, tiredness to loss of smell and taste. We have spent more time with our families than ever before, we have missed our friends and loved one. This time has indeed been unique. We have come to hate the phrase "My fellow South African’s” and the most commonly used phrase globally is “ You are on mute”.
Despite all of this, the economy continues to turn and move. Depending on which side of the fence you are sitting, depends on how you have financially faired during these times. I will even go as far as to say that, we are in normal times from an economic point of view, however the reasons we are here are “unprecedented” or “Not normal”.
It has been a roller coaster ride and for those with an adventurous streak, you would have loved it however for most people you either find yourself on a side of the economic fence.
The below is NOT to be considered as financial advice.
Intertest rates and inflation
Understanding a low interest rate environment
When investing we don’t normally worry about what the interest rate is, we worry about the combination of the interest rate and inflation.
Currently you can get a rate of about 4%pa in a money market, current inflation rates are 3.2%pa. Giving you a REAL RETURN of 0.8%.
What we often don’t consider, as we presuming Money Markets or Cash have close to zero risk, is the rate in which inflation can move upwards. This, as reflected in the above graph, has not been a real concern previously as our interest rates were fairly high in comparison. With the opening of the economy it is expected that inflation will trend upwards, and possibly over a short period of time.
The end result could mean annual losses for investors. By way of example, assuming inflation increases to 4.5% (still with in target), cash investors will experience a negative real return of 0.5%pa. Increasing the risk of holding cash substantially. Thus placing investors on the losing side of the fence.
On the other side of the fence sit most of the South African population and that is those with debt, according to Trading Economics global macro analysts, 69% of people’s income will be used to fund debt in South Africa. The low interest are therefore a benefitting much of our population. Assuming a bond of R2 000 000 and an interest rate of Prime plus 1%; the monthly saving sits at R3 500pm.
If you are on the losing side of the fence, where do you turn.
The downgrade to below investment grade turned out to be local investors friends. South African companies as well as the South African Government are now offering high yields to buy their bonds, if you are willing to bet they will pay you the capital back at maturity date. From government you can expect a real yield of 5.98%.
The question one would ask, will inflation rise vs will I get my capital back on my bond?
The South Africa Rand, who is winning and who is losing?
A further question would be “Is the rand weak or strong” and what does that really mean?
To understand this, I love using the Big Mac Index.
Wow would that not be great, to see the rand at R5.43 to the dollar, well we can all agree crazier things have happened. Although realistically, it is unlikely.
Let’s consider a few thoughts (briefly):
1. South Africa’s political risk plays a very small part in the movement of the rand as we saw during the Zuma years and still see today
2. Can one forecast the price of the rand, NO; can one guess as to which way the rand will move YES
3. What moves the rand: All the global economies and the creation of demand? When emerging markets are in demand, the rand being liquid will benefit from this.
Who wins from a STRENGTHENING rand?
· Importers (local retail stores, car dealerships, OIL, computers become cheaper)
· People wanting to travel (when permitted)
· Inflation is a big winner
· Foreign debt where interest is paid in foreign currency (ie IMF Loan)
And the LOSERS?
· Exporters (precious metals, fruits and nuts, wine)
· Local businesses trading in global markets
· Investors investing in above companies
· Global Investments
· Foreign investors into South Africa
In summary, someone is always making money or benefitting! It all depends on which side of the fence you find yourself. Will this last forever NO, the one constant in life is change.
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