Six months may be a number of years in economics. In January South Africans appeared to be warned to hunker down pending the increasing apr cycle, that has been being driven by higher inflation expectations – the weak rand, drought and rising food prices being the chief culprits.
Fast toward August and also the situation is pretty different. The rand has strengthened and South Africa’s inflation rate expectations have decelerated. While economic growth remains muted, the stable oil price and insufficient demand led pressure have emerged to lower inflation forecasts.
For investors this will likely influence their asset allocation decisions.
Lesiba Ledwaba, a fund manager at Ashburton Investments won’t anticipate the interest rates cycle can change much within the next 12 to Eighteen months.
“Local minute rates are also afflicted with global trends and global monetary policy is increasingly dovish,” he says.
“Expectations are which the US Fed would hike interest levels gradually in the next 12 to 18 months” says Ledwaba.
In addition, the government Reserve goes about long-term risks and uncertainty within the UK’s decision end nations. Many analysts now really don’t expect a hike in US rates before the next 1 year.
Other central banks are usually unlikely to get rates sooner. In great britain fears that economic growth could slow have raised the possibility of rate of interest cuts. In Europe the eu Central Bank, plus the Swedish, Danish, German and Swiss central banks have introduced negative interest rates inside a bid to make banks to increase their lending or investing. The same applies in Japan where it truly is hoped negative rates of interest will jolt lending, spur inflation and reinvigorate the stagnant economy.
However, all that the monetary policy environment of low or negative mortgage rates has achieved so far could be to drive the carry trade returning to emerging markets, strengthening these currencies in the process.
As an effect emerging market bonds, specifically SA government bonds, were a big beneficiary because local bond market saw about R 61 billion of inflows until now this season.
The All Bond Index (ALBI) has outperformed other asset classes this holiday season, returning 16% to investors C well ahead cash, listed property and local equities.
However the way forward for that local bond companies are not really obvious, says Ledwaba. “We don’t expect yields to transfer better in case they stay around current levels, then returns from the asset class will probably be decent.”
For investors who are not currently dedicated to bonds, he doesn’t advise getting into the marketplace after all this. “Global yields are artificially low as there was hardly any chance of them reducing much further from current levels,” he said.
The a low interest rate rate environment may however create opportunities from the equities markets, that has essentially tracked sideways this season. Specially Ledwaba believes that rate sensitive stocks C such as the clothing & furniture retailers and banks – could offer investors some opportunity.
“A a low interest rate environment helps moderate the money necessary for debt and this is positive for consumers whorrrre financing debt repayments to varying degrees. Something that consumers save in the red repayments, they can be likely to commit to retailers,” he says.
There have course risks for this inflation outlook, says Ledwaba.
“If america economy turns out to be resilient and we all begin to see inflation ahead of expected, then it’s likely that US Fed boosts rates this also could turn back flows.”
Portfolio inflows to Africa (together with other emerging markets) are notoriously volatile, driven by market sentiment and therefore cannot be relied on necessarily for extra rand strength.
On another hand, European and Japanese economies are slow to respond to quantitative easing, and uncertainty within the impact of Brexit for the UK economy may well persist. This could drive the central bankers and keep monetary policy very accommodative.
This article was sponsored by Ashburton Investments
