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Swimming against the tide?

15 August 2004 Angelo Coppola

(16.8.04) And if it is not because you're a sport enthusiast, it certainly is because of our very generous Central Bank Governor.

Neels van Schaik, at PSG Fund Managers says however that what Mr Mboweni giveth he can take away, but a gold medal is ours to stay (for those who watched the swimming). I personally find the interest rate move quite surprising.

However, considering the rhetoric at the previous Monetary Policy Committee (MPC) meetings there was quite a wind change, with no mention whatsoever this time around, about excess demand or demand push inflation in the economy.

Considering that money supply is still expanding at 12% and retail sales are growing at 10%, the fact that this is not an inflationary risk anymore is quite strange.

Mboweni is confident that inflation will stay within its target range in the next year or two (3% - 6%) and this can be considered the main argument for the drop in interest rates.

Some are arguing that the Reserve Bank has subtly started to play the rand game. This might be true, but if it really was the case they would have made a much more aggressive attempt at increasing the forex reserves, rather than attempting the futile exercise for which Mboweni's predecessor was so well known.

I don't think we are seeing a renewed loosening interest rate cycle.

If the reaction in the forex market, when the rand lost 30 cents against the dollar, is anything to go by, Mboweni might think twice before setting on a new declining interest rate path. It might very well derail all his inflation ambitions over the next year or two.

The only reason why the inflationary pressures, especially the secondary effects, from the rising oil price were absent, was because of the rand strength.

The oil price still hasn't shown any sign of weakness and any significant rand depreciation may reverse the inflation and interest rate euphoria we are currently experiencing.

Rather than trying to predict which way interest rates will go at the next MPC meeting, it is more important to mention that the latest drop has provided a much needed catalyst to equities.

Despite the feel good factor that this provides, it highlights the attractiveness of equities as an asset class. It does not make sense to be sitting with deposits in a savings account when you can earn more in dividends from sound companies than you would from after tax interest.

In addition, you get the potential upside from capital growth in the equity market which is not available in the bank. True, there are periods when one should probably be sitting on cash in the bank, but now is not the time.

Some sectors in the market, especially on the local industrial side do not reflect the positive trading environment which we are experiencing.

A number of these companies are offering very attractive dividend yields with earnings growth momentum on the rise. These shares will not necessarily rerate in the next month or two, but wealth accumulation through stock market investments have always paid off over the long term.

Remember that you invest in a company and not in a share. When investing in a sound business your wealth should grow with the company, be it through capital appreciation (growth in NAV) or dividend flow.

South African investors however, have become impatient and are driven by short term gains. This is a recipe for disaster (and discontent). Remember the cliché: Rome wasn't built in one day.

Neels van Schaik, at PSG Fund Managers says however that what Mr Mboweni giveth he can take away, but a gold medal is ours to stay (for those who watched the swimming). I personally find the interest rate move quite surprising.

However, considering the rhetoric at the previous Monetary Policy Committee (MPC) meetings there was quite a wind change, with no mention whatsoever this time around, about excess demand or demand push inflation in the economy.

Considering that money supply is still expanding at 12% and retail sales are growing at 10%, the fact that this is not an inflationary risk anymore is quite strange.

Mboweni is confident that inflation will stay within its target range in the next year or two (3% - 6%) and this can be considered the main argument for the drop in interest rates.

Some are arguing that the Reserve Bank has subtly started to play the rand game. This might be true, but if it really was the case they would have made a much more aggressive attempt at increasing the forex reserves, rather than attempting the futile exercise for which Mboweni's predecessor was so well known.

I don't think we are seeing a renewed loosening interest rate cycle.

If the reaction in the forex market, when the rand lost 30 cents against the dollar, is anything to go by, Mboweni might think twice before setting on a new declining interest rate path. It might very well derail all his inflation ambitions over the next year or two.

The only reason why the inflationary pressures, especially the secondary effects, from the rising oil price were absent, was because of the rand strength.

The oil price still hasn't shown any sign of weakness and any significant rand depreciation may reverse the inflation and interest rate euphoria we are currently experiencing.

Rather than trying to predict which way interest rates will go at the next MPC meeting, it is more important to mention that the latest drop has provided a much needed catalyst to equities.

Despite the feel good factor that this provides, it highlights the attractiveness of equities as an asset class. It does not make sense to be sitting with deposits in a savings account when you can earn more in dividends from sound companies than you would from after tax interest.

In addition, you get the potential upside from capital growth in the equity market which is not available in the bank. True, there are periods when one should probably be sitting on cash in the bank, but now is not the time.

Some sectors in the market, especially on the local industrial side do not reflect the positive trading environment which we are experiencing.

A number of these companies are offering very attractive dividend yields with earnings growth momentum on the rise. These shares will not necessarily rerate in the next month or two, but wealth accumulation through stock market investments have always paid off over the long term.

Remember that you invest in a company and not in a share. When investing in a sound business your wealth should grow with the company, be it through capital appreciation (growth in NAV) or dividend flow.

South African investors however, have become impatient and are driven by short term gains. This is a recipe for disaster (and discontent). Remember the cliché: Rome wasn't built in one day.

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