Question:
Can you guys explain to me about the interest rates of investments? How does the repo rate affect my investments? Which ones should I look into?

Answer:
Tito Mboweni. It is hard to forget a man whose signature is displayed on every hard earned banknote you pull from your wallet. What is even harder to ignore is the guessing game that plays out in your mind as you try predicting the next move — will interest rates go up, or will it go down and if so, what will it mean for me?

Quite often this leaves many economists on opposite sides of the net engaging in a Nadal vs Federer rally of grand slam final proportions with its fair share of grunts and shouts. At the end of the day, however, the call on whether the economic ball is in or out comes down to the decision of the towering judge. Sitting from his elevated position, the call will be made and the decision is final! For us, the role of umpire in our money game is suitably taken up by Tito Mboweni. Although he is at pains to point out that the decision is made collectively by all the members of the Monetary Policy Committee (MPC), he has become the 'face' of the Reserve Bank’s MPC.

In essence, the repo rate can be explained as the rate at which the Reserve Bank lends to the commercial banks. The repo rate is then given a premium of 3.5 percent to get to the better known 'prime rate'. Since December 2008, the MPC has reduced rates by a total of 4.5 percent bringing the repo rate and prime rate to 7.5 percent and 11 percent respectively.

Depending on whether you are sitting in the Federer (cash investors) or Nadal (debt owners) 'camp' will determine whether the call will be good or bad news for you and your pocket.

As an example, if you are a Federer fan and have invested in money market instruments such as fixed deposits, money market accounts or even in a fund with high exposure to cash, the recent cuts would have had an incredibly negative impact. In fact, for most, the yields that were being earned have probably tracked downwards in line with the repo rate. This is especially worrying for investors drawing an income who are at the mercy of these declining yields. In addition to this, there is the ever present threat of these yields not keeping pace with inflation (especially after tax) and ultimately resulting in the loss of buying power. Without a change of tactic, you may fall into the trap of 'saving yourself poor'.

On the other hand, if Nadal was your man and you are one of many debt burdened South Africans; this has been a welcome reprieve as debt servicing has become far 'cheaper'. This has presented a perfect opportunity for many to claw their way out of some of this debt and, in some cases, even start saving.

To get to the question of how this will impact investments in general, there is a basic rule in science that maintains for every action there is an equal and opposite reaction. In part, this has some place in financial markets and although there is much folly in forecasting and attempting to time the market, there are a few interesting trends that initiate further thought.

Michael Dodd, an investment analyst at acsis, recently conducted a study on how growth assets react and behave in different interest rate cycles with the following results:

Graph: asset class returns vs. interest rates

Rate cycle	Avg duration (months)	Average returns (p.a.)
		Equity	Bonds	Cash	Property
Low	10	27.40%	3.46%	5.23%	25.64%
Rising	28	8.55%	4.38%	11.83%	5.00%
High	12	9.28%	16.40%	12.39%	17.62%
Declining	19	25.52%	15.57%	9.66%	21.76%

• Low — from the last interest cut to the first interest rate hike (i.e. the bottom of the cycle).

• Rising — from the first interest rate hike to the last interest rate hike.

• High — from the last interest rate hike to the first interest rate cut (i.e. the top of the cycle).

• Declining — from the first interest rate cut to the last interest rate cut.

What this illustrates is that historically, equity returns outperform bonds, cash and property in the low (27.4 percent) and declining (25.52 percent) phases of the interest rate cycle. Bond returns are at their best in the high (16.4 percent) and declining (15.57 percent) stages. As would be expected, cash returns are at their best in the rising (11.83 percent) and high (12.39 percent) phases of the interest rate cycle. Property returns are at their highest in the low (25.64 percent) and declining (21.76 percent) phases of the cycle.

According to the consensus of most economists, we are unlikely to see further rate cuts and therefore are at 'the bottom' of the interest rate cycle. Considering the above, there is a strong argument to suggest that growth assets (property and equities) are an attractive place to be.

Does this mean that you should be exchanging your short volley for an aggressive net smash? Absolutely not, what it should rather do is question whether your current game style is best suited to your overall strategy. It may just mean adjusting your grip or changing rackets and who better to do this than a coach — a financial one.

All the best.

acsis Limited is an authorised financial services provider. The response to the question covers some of the issues in a general and factual manner and does not constitute advice. It is important to consult with a financial planner who, after an analysis of the individuals’ personal needs, goals and circumstances, will be able to provide comprehensive and appropriate advice.

If you would like acsis to put you in touch with an independent financial planner, click here!

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