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Cape Town - While in the past an interest rate hike would have been positive for retirees, the impact on their investments today is less clear, according to Santhiran Naidoo, investment analyst, Glacier by Sanlam.
This is because there has been a shift to more diversified portfolios.
On January 29 South African Reserve Bank Governor Gill Marcus announced that the repo rate would be increased from 5.00% to 5.50%.
This followed a sustained period of interest rate decreases, which saw interest rates fall to multi-decade lows.
"Consumers generally have debt obligations such as house and car bonds or even shorter term loans and have been aided by the declining cost of their debt," said Naidoo.
"South African consumers have, therefore, reacted negatively to the announcement that sees an increase in the cost of their debt."
Retirees, on the other hand, are generally free from these obligations, so the impact of rising interest rates has usually been somewhat different for them, according to Naidoo.
Traditionally, retirees have been invested in safer, low duration fixed interest investments such as money market funds or shorter term bond funds.
This has provided investors with relatively low risk investments. In a rising interest rate environment, instruments that yield higher levels of income become available.
This would boost the yield that retirees receive from their investments.
However, as the industry has evolved, education around personal risk profiling and diversification has advanced.
This has seen retirees shift their exposure from these low duration fixed interest investments into more diversified portfolios.
Their portfolios now often consist of riskier growth assets such as equities and property as well as longer duration fixed interest investments.
Rising interest rates generally impact these riskier asset classes negatively, said Naidoo.
Longer duration bonds experience capital losses while property prices decline as the cost of debt to finance development and purchases increases.
"The effect on equities is less clear. In instances where interest rates are increasing due to an improving economy or to control modest inflation, companies may be able to sustain growth and/or pass through those inflationary pressures to consumers," said Naidoo.
"However, if rates increase in a poorly performing economy, the cost of debt may significantly impact the profitability of companies."
This is because there has been a shift to more diversified portfolios.
On January 29 South African Reserve Bank Governor Gill Marcus announced that the repo rate would be increased from 5.00% to 5.50%.
This followed a sustained period of interest rate decreases, which saw interest rates fall to multi-decade lows.
"Consumers generally have debt obligations such as house and car bonds or even shorter term loans and have been aided by the declining cost of their debt," said Naidoo.
"South African consumers have, therefore, reacted negatively to the announcement that sees an increase in the cost of their debt."
Retirees, on the other hand, are generally free from these obligations, so the impact of rising interest rates has usually been somewhat different for them, according to Naidoo.
Traditionally, retirees have been invested in safer, low duration fixed interest investments such as money market funds or shorter term bond funds.
This has provided investors with relatively low risk investments. In a rising interest rate environment, instruments that yield higher levels of income become available.
This would boost the yield that retirees receive from their investments.
However, as the industry has evolved, education around personal risk profiling and diversification has advanced.
This has seen retirees shift their exposure from these low duration fixed interest investments into more diversified portfolios.
Their portfolios now often consist of riskier growth assets such as equities and property as well as longer duration fixed interest investments.
Rising interest rates generally impact these riskier asset classes negatively, said Naidoo.
Longer duration bonds experience capital losses while property prices decline as the cost of debt to finance development and purchases increases.
"The effect on equities is less clear. In instances where interest rates are increasing due to an improving economy or to control modest inflation, companies may be able to sustain growth and/or pass through those inflationary pressures to consumers," said Naidoo.
"However, if rates increase in a poorly performing economy, the cost of debt may significantly impact the profitability of companies."
