Investors need to gear up for rising interest rates

David Crosoer, Executive: Investments and Research at PPS Investments.

We’re entering an important phase post-financial crisis where interest rates are unlikely to provide a tailwind to inflating asset prices. This is according to David Crosoer, Executive: Investments and Research at PPS Investments.

Record-low interest rates have resulted in equity and fixed income markets both locally and abroad trading at very unattractive levels from a buying perspective.

“These low rates since the global financial crisis have distorted the price investors are willing to pay for a number of assets including equities and these could unwind as interest rates normalise. In South Africa, interest rates have already started normalising,” says Crosoer.

The Monetary Policy Committee (MPC), as widely expected, raised short-term interest rates by 0.25% up to 6.00% at its meeting last month. We anticipate that the South African Reserve Bank (SARB) will continue to increase interest rates as US short-term rates normalise and SA CPI inflation threatens the 6% level.

He says despite being one of the few central banks to raise rates recently, the South African Repo rate remains abnormally low, and the increases so far are very measured when compared to previous cycles. “For now, at least, the SARB has probably bought some breathing space, given June’s CPI number at 4.7% was lower than most analysts expected, and the US Fed might still not raise rates in September.”

He warns that investors should remain cautious as SA’s fundamentals continue to look poor, and the market might be too optimistic in dismissing the likelihood that the US Fed might still raise rates quickly as the economy improves.

He says it is important for investors to ensure their portfolios are positioned for this increasing interest rate environment. “In the PPS Portfolios, in doing so, we remain overweight in our cash manager and international equity managers, and underweight in our South African equity and bond managers,” says Crosoer.

He attributes this to his concern that the local equity market is expensive and that South African interest rates are too low in the context of still impending US rate hikes.

“The money clients entrust us to manage has been invested accordingly with exceptional asset managers who apply their considerable expertise in assessing which shares to include in their portfolios.”

He explains that these managers base their decision on a number of factors based on their investment philosophy and style, but most importantly all these managers will hold shares they think will perform in the future, not shares that have simply done well in the past.

Crosoer says, “We are very deliberate about including managers that are different from each other to reduce the dependency of our portfolio on any particular idea.”

In choosing a unit trust, he suggest that clients determine their individual objectives, risk profile and time horizon, ideally with the assistance of a financial planner.

“For goals which are not too far away, it is imperative to invest in instruments designed for the shorter-term and that allow you to access the funds when you need it. For longer term goals, typically, less conservative investments may be an option, because you have the time to see the potential gains,” says Crosoer. In this case, investors need to remain focused on their long-term goals and look past any short-term volatility.

Importantly, in choosing a company to invest with, investors also need to ensure that the investment business provides an appropriate value proposition for their needs, concludes Crosoer.