Mixed feelings as July 2012 Savings Month flashes by

Gareth Stokes, FAnews Online Editor

July is savings month. It is a month during which stakeholders across the financial services industry highlight to consumers the importance of saving. It seems, however, that savings month 2012 has been rather uneventful. The first press release on the to

I get the feeling that the current savings malaise is due to the “cash is trash” message broadcast by economists and fund managers around the globe. It seems as if banks and other financial institutions are deferring the “save more” message due to the poor returns on typical cash or near-cash products. At a recent Old Mutual Investment Group SA media presentation the group warned that investors would have to “get real about real return”. They backed up this message with five-year asset class return forecasts, domestically and abroad. Local cash investments will provide just half-a-percent real annul returns over the period, while global cash and bond investments are forecast to generate negative real returns.

An understandable reluctance to save

South Africans are reluctant to save at the best of times. Average Joe steers clear of fixed deposits and other short-term investments because he would rather purchase a flashy car or new appliance today than a decade down the line. Gavin Came, Chairman of the Financial Planning Committee at the Financial Intermediaries Association (FIA) picked up on this in his organisation’s savings month plea: “Most people realise the importance of having savings in place but are unable or unwilling to defer short term consumption such as buying new clothes or a new car, or paying for an annual holiday. As a result, their immediate wants tend to take priority over provision for the future.”

Assuming we address the desire for instant gratification there are many other obstacles to saving in the 21st Century. One argument is that consumers are ignoring requests to “save more” because of South Africa’s lacklustre performance on both the jobs and GDP growth front. Why save if the economy is going nowhere, they might ask... And why stick money in the bank when the deposit rates are so poor? Domestic inflation has hovered near 6% for quite some time… Given that many people would kick off their savings drive by building up an emergency reserve, the near zero interest rates on short-term and notice deposits are actually a disincentive to save. And things could get worse!

From “cash is trash” to “not at my dump site”

It is common knowledge the US Federal reserve will keep interest rates in the world’s largest economy on hold until at least 2014. Until recently South African economists believed that the Reserve Bank would follow suit by pegging the Repo rate at 5%. That is why at least 16 of 18 economists surveyed by news agency Bloomberg prior to the July Monetary Policy Committee (MPC) meeting expected a “no change” decision. Imagine their surprise when a 50 basis point (half-a-percent) interest rate cut was announced on Thursday, 19 July 2012. (This was the first change in interest rates since November 2010).

The MPC decision was fuelled by concerns over economic growth and expectations of domestic consumer price inflation trending softer. On the growth front they noted a generalised slowdown in the global economy. “The problems in the Euro-zone are likely to persist for a protracted period,” said Kevin Lings, economist at Stanlib. And with resolution to the regions problems unlikely before the end of this year, the negative spill-over effects to South Africa are likely to intensify. The Reserve Bank expects inflation to remain fairly stable at around 5% until end-2014. “It is unlikely that the reduction in interest rates will lead to a significant and immediate boost to growth, especially employment growth, but should help to limit the current slide in both business and consumer confidence,” added Lings.

The interest rate cut will have a knock-on effect on the returns on cash and near-cash investments. As a result the “cash is trash” theme will escalate to what I call “not at my dump site”… Cash is so “trash” that even fund managers are wondering what to do with it! Both savers and retirees who rely on fixed income products for survival will be affected by the latest decision.

Saving and investing through the interest rate cycle

When all is said and done the “save or not” proposition comes down to whether or not the domestic consumer is able to save given his / her financial reality. Household debt to disposable income has hovered around the 75% mark for longer than we care to remember, and on average, 6000 South Africans apply for debt counselling every month. Statistics compiled in the Finscope 2011 study confirm that 66% of the adult population does not save because of a lack of funds.

Commenting on the savings environment, Arrie Rautenbach, Absa Head of Retail Markets, said: “Although consumer confidence would be buoyed by the decision to reduce rates, it has become evident that there is a dire need to stimulate consumer investment and raise the nation’s savings rates lest the household sector enters the next interest rate hiking cycle with a still-high debt-to-disposable income ratio that could very quickly manifest itself in severe financial instability.”

Low interest rate environment or not, the only solution for consumers intent on a financially secure retirement is to save as much as possible as early as possible. “While it is tempting to ignore the demands of the future and concentrate purely on their short term needs, by engaging the services of a qualified and professional financial planner early enough, consumers can plan for a comfortable retirement without being forced to make significant compromises to their current lifestyle,” concludes Came.

Editor’s thoughts: South African investors have a love affair with cash investments. It was only recently that asset allocation unit trust funds overtook money market funds as the top category (by assets under management) in the domestic unit trust space. But there are billions of rand tucked away in money market unit trusts earning near zero percent in real terms. Does the half-a-percent cut in interest rates affect how you advise your risk-averse clients? Add your comment below, or send it to gareth@fanews.co.za