Some good news for investors

Ian Scott, Head of Fixed Income at PSG Asset Management.

Despite all the negative news at the moment, there are still good opportunities for investors and savers in South Africa to earn high yields.

Ian Scott, Head of Fixed Income at PSG Asset Management says, “We all know that inflation is the enemy of savers and investors over time. However, we are likely to see inflation falling over the course of this year.”

Over the last few years as the rand sells off, investors have seen that inflation rises as import prices increase and the South African Reserve Bank (SARB) raises interest rates to maintain the inflation-targeting framework.

“What we are witnessing at the moment is the opposite of that effect, which is good news for savers and investors,” Scott says.

Lower inflation rates are firstly expected due to falling grain prices as good rains have been recorded in the northern maize growing areas of the country, which could lead to lower food prices in the latter part of the year. The good news for consumers is that this will lead to lower food inflation and will help the SARB in their aim to keep inflation in the target range. Secondly, the high base effect of the rand over the last year on import prices is also disinflationary.

So where is the positive news for investors then?

“Well, interest rates in South Africa remain high, firstly due to interest rate increases over the last two years, as well as the introduction of more onerous bank capital regulations. These translate into banks paying higher rates to depositors like ourselves for the benefit of our investors. We are able to take advantage of these higher rates for investors,” says Scott.

The opportunity is in what is known as real rates (i.e. the interest rate an instrument yields above inflation). The higher the real rate, the more beneficial it is to the investor. The most probable outlook that Scott sees domestically is for real rates to rise: he says PSG Asset Management anticipates inflation falling over the course of the year and official interest rates only following with a lag.

This will be most evident in fixed income unit trust funds. Fixed income funds lock in high real yield instruments before the inflation cycle turns and maintain those yields even though inflation and market interest rates are falling (i.e. the term ‘fixed income’ or ‘interest’).

“We are finding high real yield opportunities in various fixed income markets. Cash/money market yields are attractive given their short duration nature. Government bonds return a high real yield given their credit quality and liquidity, and we are also finding attractive real yield opportunities in selected areas of the credit market.”

Scott says the real opportunity for investors and savers will be in funds with a high, fixed rate exposure locking in yields that will not be available in the bank deposit market once the SARB signals that the interest rate cycle has turned. Investors will be able to benefit from the higher fixed rates in funds while inflation and market interest rates are falling, coupled with the fact that investors in funds don’t have to be locked in for a fixed period to receive those higher yields.