Savers penalised for government’s sins
Johannesburg – Low interest rates are not the only way that debt-leaden governments across the globe can extricate themselves from their predicament.
It will also take a long time for their debt to be cleared, which means that interest rates will remain very low for an extended period.
To mitigate government debt with low interest rates will however have far-reaching consequences for people who are trying to save or who are dependent on savings for their income, says Peter Brooke, head of MacroSolutions at Old Mutual Investment Group (Omigsa).
Brooke says governments or developed countries need to pay down $6 000bn of debt before their indebtedness will balance with their gross domestic product (GDP).
The only solution is low interest rates over a long period in order to relieve governments’ interest burden so that their debt can be discharged.
The fact that the monetary authorities are aware of the situation in which governments find themselves is evident from the 36 global interest rate reductions so far this year, says Brooke. These include the one in South Africa the past week, two in China last month and adjustments to the refinancing and deposit rate by the European Central Bank. Expectations are that there will be further interest-rate cuts over the rest of the year, Brooke says.
“There’s still no solution to the debt crisis and meanwhile prospects for economic growth and company returns are weakening.”
Brooke says for investors this means that they need to steel themselves for a long period of lower than average economic growth, continuing political upheaval and volatile markets.
The overarching theme for investors is that investments in cash will produce negligible returns and they will need to look for good yields elsewhere.
Exactly how dismal the investors’ situation is can be seen in that some money market funds no longer accept new investments because the returns on them are generally lower than the inflation rate in the countries concerned. This means that cash savings simply become eroded by inflation and do not keep up with increases in the cost of living.
In many countries inflation is indeed very low, but won't remain so for long. As always, the spectre of inflation will continue to stalk us.
The surprising reduction in the South African repo rate last week is proof that South Africa is not immune to the flagging returns being experienced in the rest of the world.
Returns on stocks and property have already fallen by 80 basis points, producing breathtaking capital growth, says Brooke. But it would be unrealistic to expect this to persist.
Foreign and South African shares, he says, are currently the best options and expected to produce a 6.5% return. That's not spectacular and, in addition, one must take into account that returns on shares fluctuate violently depending on macroeconomic conditions.
Investors are therefore caught up in an investment environment where yields will remain low and can swing dramatically and where they cannot take refuge in cash.
The only solution is to diversify an investment portfolio well between the different asset classes and to moderate expectations as to the returns that can be achieved.
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