Savers penalised for government’s sins

2012-07-22 12:03

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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  • kennyhubbard - 2012-07-22 12:58

    This headline is a bit overdramatic, but I guess thats how you get attention. Also some of the points don't make sense. The article opens with the statement that low interest rates are not the only way to go(yet offers no alternative), and 4 paragraphs down goes on to state that low interest rates are the only solution???? I agree that the savers will lose out......such is the nature of investments. Sometimes I invest in shares and the value or the dividends go down. Saving is also an carries risk and return. Sometimes those returns go down.

      arno.pfohl - 2012-07-22 15:18

      savings from your salary is the only way for most people. not everyone can afford to gamble on the stock market especially when there little bit of savings is so valuable to them. how on earth do you expect the majority of the population to inrich there wellbeing. use some common sense.

      Klaus - 2012-07-22 16:14

      kennyhubbard, I hope for your sake that you make 65 years of age, and maybe older, so as to reap the profits of your savings ? At between 5 and 10 % interest, assuming you need at present rate R 20 000.00 to tie you over - how much do you need ? Furthermore what will you do if Banks or Politicians decide that 1% is OK ?

      denny.cray - 2012-07-22 22:13

      Right and as we stand given that people who "save" money in banks are often earning interest below the inflation rate (and being taxed on it to boot) it is actually not even risk free return - it is real return free risk.

      armand.horn.58 - 2012-07-23 11:53

      @Claus. Yes and the you get a wise ass broker that talks you into an investment and you lose 50% of your capital! I am much more conservative now a days end are grateful for the little interest I can get knowing my capital is still safe .

  • arno.pfohl - 2012-07-22 15:07

    cant save=no deposit for house= housless forever.

      kennyhubbard - 2012-07-22 16:01

      arno, I wasn't debating the merits of saving vs investing in the stock market. My argument is that people need to understand that when you place your money in the bank, it is not the same as placing it in a piggy bank, which is true saving. When you deposit money in the bank, you are lending them money in exchange for interest. Traditionally this has been a safe investment and therefore brings in the lowest rate of return. My point is that it is still an investment and therefore subject to fluctuations in returns. I agree people should save for a deposit on a home. I believe owning the roof over your head is the best investment you can make in the current times. Worth noting is that the average bank capital ratio is around 10%(don't quote me on this) which means that for every rand on deposit, there is 9 rand of debt out there.

  • michael.moolman.7 - 2012-07-22 18:58

    I'm confused. I read in various media forums; Global economic slowdown. European debt crisis. Unemployment rises. Interest rates drop. Far Eastern economies off their peaks. Pospects for economic growth remain weak. Personal debt at high levels. Then why does the barrel price of oil remain high?

      pgibbings1 - 2012-07-23 08:18

      JP Morgan, Goldman Sachs, George Bush... They are all involved in manipulating the oil price. The real freemarket price is much lower

  • maureen.churchill.9 - 2012-07-24 06:13

    Capitec offer 5.5% on savings and day to day accounts, and 8.5 on fixed, as we are to understand the interest rate in banks will not increase for some time. Look at the options with Capitec. Pensioners who saved all their lives and who WERE living off the interest, no problem to the powers that be, are having to scrimp and scrape. The half per cent interest rate cut will make no difference to the person in an average priced home, it benefits the rich. With commission and admin fees if monies are placed with investers is something which must be weighed up very carefully. Use it, don't use it, its just my opinion.

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