This week the Minister of Finance, Enoch Godongwana, will present South Africa’s budget allocation for 2024 to parliament. Many South Africans will be watching, waiting to hear some good news from the finance minister on budget reforms that would benefit their already strained financial conditions.
The economic pain is not localised to South Africa only. According to the World Economic Forum’s Global Risk Report for 2024, the global system has proved “surprisingly resilient” despite geopolitical upheavals and economic strife. Still, the Forum’s Global Risk Perception Survey highlights a “predominantly negative outlook for the world in the short term that is expected to worsen over the long term”.
Paul Counihan, chief wealth officer at Fedgroup, a specialist investment and insurance group in South Africa, agrees that the level of angst in the world is slightly higher than normal at the moment. He argues that the current level of volatility was amped up by the rollercoaster interest rate environment that originated with emergency monetary policy interventions from governments during the pandemic. To help assuage the economic impact of Covid-19, interest rates were dropped to their lowest rates in decades, only to be ramped up quite steeply since then to curb a high inflationary environment.
“In that space, there was no … smooth monetary policy that was rolled out globally,” says Counihan. “It’s been vicious ups and downs.”
Persistent elevated inflation and high interest rates do weigh heavily on economic growth, but, says Counihan, it also brings opportunity.
Higher yield, lower risk
When investors look at their overall portfolios, it is prudent to diversify across investment in the search for yield. Therefore, a fixed-income or structured product that provides stability and income generation in those portfolios has always had the role of providing a lifeline in volatile conditions.
Counihan points out that currently, considering global interest rate levels, investors can get a good yield on low-risk investments. For example, in November last year the yield on the 10-year Treasury bond in the US was the highest it has been since the financial crisis in 2007.
In South Africa, over the course of 2023, the South African Reserve Bank (Sarb) increased the repo rate – the rate at which it lends money to private banks – to a 14-year high of 8.25%.
In February, the monetary policy committee unanimously voted to keep the rate unchanged. While there is chatter about rates staying higher for longer, eventually the tide will turn, and monetary policymakers will start lowering interest rates. Counihan says the consensus is that the Sarb will start with cuts to the repo rate in the second half of this year. Once that starts happening, then interest rates effectively get closer to the level of inflation.
Now is the time, says Counihan, to look at alternative asset clusters, like structured products, fixed-interest rate deposits, and fixed-income options to carve out more predictable returns outside of the traditional money-market environments.
Certainty in a year of change
This year is, without a doubt, a year of change. While no one can predict what the next 11 months will bring, one thing is certain – by the end of this year, world governments will look vastly different from their current state, simply because of the magnitude of democratic elections scheduled.
Globally at least 64 countries are meant to hold national elections, comprising around 49% of the world’s population.
While this is unprecedented, Counihan does not believe the touted ‘Global Election Year’ should be the sole reason why investors turn to fixed investments. It should be part and parcel of a conversation that investors are having regularly with their financial advisors, notwithstanding once-off external factors.
He motivates the concept of “asset-liability matching”, where investors should understand their financial goals and plan to use current assets to pay for future liabilities. In essence, understand when and where funds (liquidity) will be needed to match the liabilities that will be incurred at that specific time. “That is where these more predictable instruments are very important.”
Alternative asset classes
Counihan makes the point that the term “alternative asset classes” doesn’t necessarily equate to “volatile and risky”.
“[For us] it is actually alternative assets that are not often thought of and that can give that predictability.”
Fedgroup focuses specifically on commercial property, smart agriculture, and renewable energy in South Africa. Focusing solely on the domestic environment, albeit geographically diversified across the country, is a strategic decision for the group as it feels it has the local expertise and knowledge to provide predictable returns and adequately manage the risk on the ground here in its backyard.
“We understand these three core asset classes intimately,” he says.
Look for simplicity and longer-term commitments
When investors consider a fixed income or structured product, Counihan advises them to look for a product that they can understand.
“I see a myriad of financial products out there in the market that are just very hard to understand. Sometimes, I even think most professionals won’t understand them.”
Once they find the appropriate product, says Counihan, they need to be able to commit some funds for the longer term.
“A true investment is generally three years [or longer]. [Anything shorter] is saving towards something.” The asset classes Fedgroup looks at are mostly around five years. Fixed investments also protect investors against reactionary investment decisions based solely on political or economic factors in any given year.
Considering the current context, Counihan believes locking in a five-year predictable rate at double-digit returns now is one of the best decisions an investor can make.
Brought to you by Fedgroup.
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