How to invest for the current interest rate cycle

By Staff Writer
Nicolette Dirk, finance writer, Justmoney.co.za
 
Consumers have had significant relief over the past few years with interest rates being close to their lowest levels in almost 40 years. 
 
But according to Lourens Coetzee, investment professional at Marriott Income Specialists, it is important for investors to position their savings portfolios appropriately because it is expected that interest rates will continue to go up.
 
“The latest easing cycle in South Africa, which began in 2008, coincided with quantitative easing (QE) in first world markets. This form of monetary policy kept bond yields artificially low for a protracted period of time, in the hope of stimulating economic growth,” said Coetzee.
 
 It is widely anticipated that this unusual form of monetary stimulus will come to an end in the latter part of 2014, placing upward pressure on bond yields. Coetzee added that this is likely to coincide with interest rate hikes locally. Investors, therefore, need to consider the investment implications of a normalising yield environment. Now that most first world countries’ economic growth has returned to normal since 2008, bond yields have also risen to a normal level.
 
How are markets performing?
 
According to Coetzee markets performed better during periods where interest rates were declining. “During tightening cycles, on average, cash fared well relative to other asset classes, while bonds performed the worst. With an expectation of rising bond yields going forward, this trend is set to continue,” said Coetzee.
 
He added that given the high correlation between bond and property performance, investors should exercise caution with fixed interest bonds and listed property, at this point in the interest rate cycle. 
 
What should investors do?
 
With the consumer under financial pressure, earnings growth from companies in South Africa will not be significant according to Coetzee. 
“Given this outlook, combined with demanding valuations, it suggests that investors need to reduce their return expectations for local equities in the years ahead,” said Coetzee. 
 
He added that this is because this market is more expensive than it was in the past. He added that investors should consider some exposure to first world equity markets, where valuations are attractive and investors could find diversification benefits.
 
How can investors ensure an acceptable outcome?
 
Invest in companies that offer basic necessities, such as food, telecommunication and healthcare. According to Coetzee these businesses are defensive and will be able to grow their earnings, regardless of a consumer slowdown.  

Head of financial planning at Intelligent Debt Management (IDM), Dave Cumming, agreed saying that defensive stocks are a good bet when the equity markets face a potential downturn. 
 
These type of stocks offer a stable dividend yield even during times of recession.
Cumming added that despite how interest rates perform a good rule of thumb is to keep your investment portfolio as well diversified as possible.
 
“Getting the correct asset allocation within your portfolio is one of the most important factors to consider the idea is that if a certain asset class performs badly you have a spread of other asset classes in your portfolio that will perform in a different manner,” said Cumming.

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