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Kirk Swat *
South African Interest Rates: South African Reserve Bank (SARB) Wealth Manager and Regional Director A world that raises the November repo (repo) by 0.25%. The repo rate has been increased from 3.5% to 3.75%. Interest rates are expected to rise further as interest rates around the world have been lowered to decades lows to counter the economic impact of the Covid-19 pandemic. The price is expected to normalize, but the pace at which it arrived may have surprised many. Some economists expect the South African Reserve Bank to raise its repo rate by 0.25% on a regular basis until pre-pandemic levels reach around 6.5%. Interest rate hikes are “data-dependent,” a fancy way to say that the South African Reserve Bank is on the lookout for inflation.
Inflation in South Africa: For the average South African, rising interest rates are important because they show that SARB expects inflation to rise in the medium term. Interest rates are used as a means of cooling economic borrowing, which serves as a means of combating inflation. South Africa’s Consumer Price Index (CPI) was 5% in October, but is still within the target range of 3-6%. South African fixed income investors can comfort themselves that the current yield on 10-year South African government bonds is 9.68%, providing investors with a real yield of 4.68%, despite rising living costs. .. Real yield refers to the yield offered above the inflation rate.
Impact of US Inflation on South Africa: In contrast, US inflation in October recorded a reading of 6.22%, while the current yield on 10-year US Treasuries is 1.57%, which is -4.65% for investors. Provides a real yield of. As South Africa is a net importer of goods and services and, as a result, an importer of inflation, the US inflation rate would undoubtedly have influenced SARB’s decision to raise repo rates. It is important for the South African Reserve Bank to be proactive rather than a follow-up, as global inflation will be South African inflation. The Federal Reserve Board (FED) has shown that it will stabilize interest rates between 0 and 0.25% in early November and will not raise interest rates until the post-pandemic economy is fully recovered. However, the economic recovery from the Covid crisis was quick and powerful.
Global Growth and Global Inflation: Global GDP fell by just over 10% from the fourth quarter of 2019 to the second quarter of 2020, but recovered to 2019 levels by the second quarter of 2021. It is now more than 5% above the 2019 level. .. Incredible rebounds have been made possible by the magnitude of policy support. Post-pandemic financial support is registered at 12% of global GDP. In context, global financial support during the 2008/09 financial crisis was only 2% of global GDP. The strong and rapid recovery of global GDP has had the unfortunate consequence of inflationary constraints on the global supply chain. These constraints are not only on physical commodities (temporary) such as semiconductors, which are likely to ease over time, but also on the labor market. The labor market shortage is becoming more pronounced as workers’ early retirement, telecommuting efforts change the working environment and workers demand more flexible working conditions. Stimulation checks sent to households also prevent workers from returning to their previous employment. Labor market shortages can become tenacious as higher wage demands and better working conditions take hold. To date, most central banks have reported that inflation generated by large-scale financial support is inherently temporary. If some of the underlying inflationary pressures turn out to be more permanent, many central banks in advanced economies will raise interest rates faster than originally intended.
Strategies to Protect You from Inflation: South African investors can hedge inflation and rising interest rates by adding the above South African government bonds or listed South African banks to their portfolio. In the last few decades, the banking industry has often been described as operating according to the 3-6-3 Rule. You will receive a 3% deposit, rent it at 6% and arrive at the golf course by 3 o’clock. To be fair, modern banks are a bit more complicated than that, but the underlying facts remain true. Rising interest rates are good for banks’ margins, as they collect more interest income from the funds they lend.
Outperforming Banks: South African banks have been revalued following the April 2020 lows, but are trading below the levels traded three years ago. The exceptions are Capitec and Investec *. FirstRand *, ABSA, Nedbank and Standard Bank are all trading at low levels. These banks have a price-to-book value ratio close to 1 and are trading above 5% with attractive dividend yields. All of these banks are well capitalized and long-term rises in interest rates have a net positive impact on earnings.
HELP: The FTSE / JSE Financial 15 Index has achieved a return of -13.89% over the last three years, compared to 28.36% for the FTSE / JSE Top 40. This is a 42.28% difference. Rising interest rates may require South African bankers to return to the golf course by 3 o’clock. Inflation in the world will be inflation in South Africa, and it is already. The debate over whether inflation will be temporary or permanent has never been resolved. However, it is still wise to add bank stocks as interest rates will eventually rise. If not now, definitely in the next few years. * Overberg owns FirstRand and Investec on behalf of its clients.
- The opinions of all writers are their own and do not constitute investment recommendations or financial advice. Before making an economic decision, it is important to talk to a qualified wealth and investment expert.
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Don’t overlook South African banks
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