With the rand likely to be under pressure and interest rates set to climb, where should you be investing your money?
A natural reaction would be to invest in shares that benefit from this environment, such as rand hedge stocks, but Mark Appleton, chief investment officer at Barnard Jacobs Mellet Private Client Services, points out that the opportunity may have already passed. With resources up over 20% since May, much of the depreciation in the rand has already been priced into the market.
But the market’s overreaction to interest rates has created an opportunity. Appleton says now is a good time to look at financials and industrials, which have been wrecked by the new interest rate environment. He warns, though, that good stock picking is still important. Don’t rush out and buy everything in sight.
Appleton says that some quality banks and retailers are sitting on price:earnings ratios of below 10. These offer an excellent buying opportunity.
He also points out that listed property is offering excellent yields, with blue chip counters offering forward yields of up to 9%, while still underpinned by strong fundamentals such as increasing demand for industrial and office space.
”It depends on where you see interest rates going, but if they don’t go higher than 150 basis points from now, these shares are looking cheap.”
He argues that the Reserve Bank will be cautious about cutting growth by pushing interest rates much higher.
Standard Bank economist Goolam Ballim said it is improbable that the Reserve Bank would hike rates by more than 150 basis points. He said growth will still be about 4,5%.
Bad debts are at an all-time low and even if they had to double it would not have a significant impact on the bank’s profitability.
Overall consumers are better placed than they were in 1998 and interest rates would have to go up by about 400 basis points before we would see the same level of stress experienced at the end of the 1990s.
Standard Bank has, however, released its latest residential property report and is expecting growth in house prices to continue to decline over the short term and even reach a level of no nominal growth, although over the medium term it expects house prices to recover and price increases to normalise by mid-2007.
Therefore, it expects a decline in purchases of investment property, particularly as the house price to rental income has been increasing, meaning that rentals only cover about two-thirds of bond repayments.
Ballim argues that despite the lacklustre performance of property, it is still a good idea to put extra cash into your mortgage bond.
”When there is still so much market volatility, putting your money into your bond is a safe option.”
Although the rand has already depreciated against the dollar, Appleton says that a decision to invest offshore should not be driven by a fear of rand collapse but rather part of the natural diversification of one’s investment portfolio. It is still a good time to diversify.
However, he says that offshore returns will probably be sweetened by the fact that the rand will continue to be volatile.