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Prepare for possible prime rate of 10% - expert

Cape Town - Given SA’s poor growth, the outlook for interest rates is fairly subdued, according to Ursula Maritz, chief investment officer at wealth management company Southern Charter.

“Expectations are that in total, interest rates could be hiked by a further 100 basis points over the medium term, implying a prime rate of 10% within the next 18 months or so," she said.

The SA Reserve Bank has hinted that this could be done by small incremental increases of 0.25 basis points as opposed to big hikes.

The upward pressure to rates is being driven by rising headline inflation, which is reflecting the impact of the weak rand, rising food prices and rising electricity prices.

Inflation is expected to reach a peak close to 7% later in the year, before retreating to around 6%.

"Any blowout in the rand and subsequent impact on inflation will trigger bigger rate hikes,” she said.

Investment outlook

At present, the South African investor outlook is fraught with uncertainty, according to Maritz.

She said the biggest concern is the state of the South African economy, which contracted by 0.6% in the first quarter of this year.

It was hurt by a 24.7% and 4.4% drop in mining and manufacturing respectively.

Together these declines subtracted 1.3% from GDP, which implies the rest of the economy only grew by 1.4%.

“The 0.6% contraction is the weakest quarterly growth rate since 2009 and sets us on a growth path of 1.9% for the year, down from 3.6% in 2011,” said Maritz.

Exports hurt

The chaos in the mining sector, together with poor growth in the Eurozone, SA’s biggest trading partner, has hurt the country’s export growth.

“In addition, the more than 40% drop in the rand over the last three years has not stimulated export growth, as South Africa’s competitiveness has been eroded by rising labour costs," she said.

The combination of disappointing export growth and firm import growth has resulted in a long running trade deficit, now at a record R13bn.

SA’s current account deficit remains large, at 4.5% of GDP.

“This is manageable as long as SA has capital inflows to finance this deficit. The concern is that these flows will reduce as offshore investors become more discerning," she said.

The recent credit rating down by Fitch from a stable to negative outlook and S&P’s full downgrade from BBB to BBB- puts SA on a negative watch-list for global investors.

"The renewed global search for yield has been our saving grace thus far this year. This will change, however, as interest rates start normalising or if South Africa loses its investment grade rating," she said.

"If this occurs, SA will have huge capital outflows and the country’s balance of payments will have to be far healthier to prevent significant rate hikes.”

Asset spread

She said that given the poor outlook for the South African economy, Southern Charter favours global assets spread across both global equities and property.

“Both these asset classes are benefiting from the improved global growth outlook, the global search for yield and attractive valuations," she said.

“On the local front, we are more cautious as opportunities are limited. Local equities are expensive, but given the stock picking ability of our underlying managers, we are confident that equities will still provide the best return relative to bonds and cash.”

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