Mr TT Mboweni, Governor of the South African Reserve Bank, yesterday announced the decision of the bank’s Monetary Policy Committee (MPC) to keep interest rates unchanged. The decision was widely expected by the market.
The release by Statistics South Africa on Tuesday showed that South Africa's targeted consumer inflation slowed to 6.4 percent year-on-year in August, in line with expectations, from 6.7 percent in July. A major component of inflation, the food and non-alcoholic beverages index which previously proved sticky, recorded a decrease to 6,8 percent year-on-year in August 2009 from 8,3 percent year-on-yearin July 2009. This, together with the transport index inflation, which remains negative on a year on year basis, as well as the relative strength of the South African Rand would have weighed on the committee members’ minds as they contemplated the decision. The price risks posed by administered prices and the general signs of economic improvement may however have swayed the committee to keep rates unchanged.
From a South African investor and saver’s perspective the reality is that cash and money market investments offer low after-tax returns at present, even without a further cut. Very few investors have also participated meaningfully in the recovery that the South African equity market has experienced from its lows in March 2009. The FTSE/JSE All Share Index is up 40 percent from March 2009. The severely negative news flow and market sentiment at the time motivated many investors to exit their investments in shares and equity unit trusts in the latter part of 2008 and early 2009, in favour of the “safe haven” offered by cash and money market investments. For many investors that strong emotional reaction at the bottom of the market has inflicted the lost opportunity of not participating in the market’s recovery.
Many investors now face the precarious decision between either earning low returns on cash and money market investments for the foreseeable future or entering more risky asset classes like equities after they have experienced a strong recovery and are not nearly as cheap as they were six months ago. This is indeed a difficult decision which investors need to make with caution and due consideration of their individual circumstances.
The extraordinary global and domestic economic environment and market experiences of the last number of years underscores our view that it is extremely difficult for the average investor to successfully predict economic conditions and market outcomes, and thereby “timing the market” successfully. This reinforces the message that investors should at all times seek appropriate advice about their financial circumstances and show fortitude in sticking with their long term financial plans as determined in conjunction with their financial advisers in order to achieve their long term financial goals.
Get the latest issue of FAnews