[TOP STORY] The impact of rising rates on cash and equity investments

Consumers may be choosing cash over local bonds: Samukelo Zwane of FNB Wealth and Investments.

SIMON BROWN: I’m chatting with Samukelo Zwane, product head at FNB Wealth and Investments. I want to touch on the impact of rising rates on cash and equity investments.

Samukelo, I appreciate the early morning time. With other guests we’ve touched on some of the sectors that sort of do better under a rising rate environment – banks and insurers in particular. But the flip side is those that are going to struggle, and that’s going to be retail- and consumer-facing [sectors]. We’ve just been talking food producers with my previous guest, and of course [also] companies with debt levels, because their debt suddenly is going to cost more.

SAMUKELO ZWANE: Good morning, Simon, and good morning to the listeners. Yes, absolutely right. The change of the rising interest rates, which we find ourselves in right now, is definitely affecting the different asset classes in different ways.

As you’ve just mentioned, your consumer goods are faced with a situation [where] consumers do not have enough disposable income to spend. So there won’t be enough walking into the shops so that they can be purchasing, which will truncate into a lower upper line in terms of their income statement, and that’s going to translate into lower valuations. So they will definitely be affected in that particular way.

But other companies in other industries are also affected in different ways. If you look at the banks, they’ve people with outstanding mortgages, and those mortgages now are yielding higher interest rates. So that’s probably having a positive impact on them.

And [where there is] any news that people are taking up new debt or new mortgages or new car loans, [those are] going to be slightly more expensive, and they’re actually making more money. And companies which [have] high debt levels are actually faced with a situation whereby they have to pay that debt at the higher price, so they will definitely be affected with lower valuations in terms of their share prices.

SIMON BROWN: And we’ve certainly seen the evidence, and and it’s no surprise, that consumers are struggling. It’s not just the fact that rates are higher – and of course, if you’ve got debt, that means you’re paying more – but it is that inflation coming through and any consumer-facing business right now is going to be finding a much tougher environment out there.

SAMUKELO ZWANE: Absolutely, Simon. I mean, it’s a double whammy. If you look at our inflation levels, we’re in a rising environment, and the focus is above the benchmark target of the Reserve Bank of  between 3% and 6%. So in general consumers are just experiencing a situation whereby the prices of goods and services are basically high. Life is becoming more expensive for them.

And then on top of that, the cost of debt is actually higher as well. So they’re finding themselves in a situation whereby they need to re-strategise, readjust in the way that they’re actually approaching their investments and their savings, so that they can actually accommodate this particular year. So it’s very, very important for them to try and reduce unhealthy debt; unhealthy debt is usually short-term debt… your credit cards, unsecured loans, all those. Avoid them or reduce them if you can at this present moment in time and that will actually help you a bit in terms of your financial planning.

We always advise, as well, when we are sitting with consumers, that you should have a healthy financial lifestyle.

First and foremost spend less than you earn. That helps you a lot. And then at least have some liquidity –  three months’ worth of your salary saved that allows you not to keep on piling debt.

So you start having a healthy lifestyle and you do not actually fall prey to this high interest-rate environment.

SIMON BROWN: And give yourself some wiggle room in that space.

The asset class bonds – coming into this year a lot of folks were saying that local bonds are attractive. But the problem is with a higher repo rate and therefore interest rates, that actually can put some pressure on bonds because, instead of buying bonds for our return, we can just go and get cash for our return and get a decent rate on cash.

SAMUKELO ZWANE: Absolutely. You are obviously right, Simon. The bonds, as well as cash or fixed deposits, those are competing asset classes. So when consumers are looking at these rising interest rates, they can make a decision and say, listen, instead of going into the bond environment I’d rather put the money in cash, which now has a slightly negative impact on the bonds. You’ll find the bonds having lower prices… they’re going to experience that effect. That’s basically the impact that this has when it comes to the bond asset class.

SIMON BROWN: Yes. And of course bonds are that inverse relationship – yields up, prices done.

The last I want to touch on is cash. If you’ve got money in the bank, it depends on how you’re earning that rate. If you’re getting a fixed rate that you fixed, I don’t know, at the beginning of the year, well, you’re under pressure. But if you’ve got something linked to prime, you are at least seeing that starting to increase as the MPC ups their rate every meeting.

SAMUKELO ZWANE: Yes, that’s absolutely true, Simon. That’s a very, very interesting asset class, so if you’re actually sitting with money in the bank which is actually earning you a viable rate, you are basically going to be benefiting from this [interest rate] hike because the rate that you’re going to be earning now is much higher.

But if you are sitting in cash and you fixed it for a term, you won’t see that immediate benefit right now because you fixed it at a previous interest-rate level. So those guys are not going to see that immediate benefit right now. But new guys coming in and fixing it for another term will get that benefit, because now they’re actually fixing it at a maybe slightly higher interest rate. That’s the benefit around that asset class. So it’s quite an interesting one for the consumer.

SIMON BROWN: Yes. It is a point. If you are in a fixed one, then you’re going to be squeezed a bit.

We’ll leave it there. I appreciate the time. Samukelo Zwane is  product head at FNB Wealth and Investments.

Listen to the full MoneywebNOW podcast every weekday morning here.

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