Adrian Fuller from Cooke Fuller Group writes :
The recent Covid-induced market sell-off saw our All Share Index drop to 37,963 points on 19 March 2020. Since then, the market has recovered significantly to around 57,000 points, reflecting an improvement of approximately 50%. Whether or not the stock market’s recovery is sustainable will become evident over time, and will depend largely on the ability of company earnings to justify and support their price.
The stock market’s ability to recover as quickly as it has is largely due to the enormous amount of money that’s been pumped into the financial system in an effort by governments and central banks to stimulate economies and ensure that financial markets remain liquid. The long term effects of these stimulus packages will be felt in due course, more than likely in the form of increased inflation.
The South African Reserve Bank recently announced yet another reduction in the repo rate from 3.75% to 3.5%. This in turn affected the prime lending rate (the rate at which you and I borrow from commercial banks) which is now 7%. The reduction in interest rates has been initiated in order to stimulate our economy which is at the mercy of the Covid pandemic as well as our response to it. RMB Morgan Stanley recently conducted a survey that found that, after Venezuela and Argentina, South Africa is the 3rd most ‘miserable’ economy in the world, and indeed one that needs stimulation.
But apart from (possibly) stimulating the economy, the rate reduction will have a profound effect on so-called ‘risk-free’ investments such as money markets and fixed deposits. I use the expression ‘so-called’ as, when interest rates reduce, and in doing so reduce the yield produced from low risk investments, one’s risk shifts from market-related risk, to the risk of not enjoying yields that keep abreast with inflation.
The unit trust industry is currently attracting its largest flows of new capital into lower risk funds due to investors (in general) taking on a cautious view following the speed and severity of the recent sell-off.
As such, going forward, real returns (returns in excess of inflation) are going to be more difficult to achieve for these investors.
Whilst lower risk funds certainly have a place in many portfolios, for good reason, I do not recommend including them at the expense of higher risk, growth funds, that are better positioned to deliver inflation-beating returns over the long term.”
