Implications of rate hikes for local investors

Andrew Morton

This time it's closer to home as the South African Reserve Bank comes under pressure to raise rates to protect the battered rand, which fell by 6% in the first two weeks of the year, breaching R18 to the US dollar before bouncing back to the top end of R16 by mid-month.

Already-stretched South African consumers saw a 25 basis point hike in the local repo rate - to 6.25% - come into effect in November 2015, and indications are that this hiking cycle will continue into the year. FNB chief economist, Sizwe Nxedlana, recently affirmed this sentiment: "Despite the weak growth backdrop, the Reserve Bank is likely to continue to raise interest rates. Given the deterioration in South Africa's sovereign credibility, it doesn't have a choice."

International rates

While South Africa and the United States are likely to hike rates, it is important to note that international interest rates aren't always correlated, despite the interlinked nature of global markets. Europe, for example, has recently cut rates. So two of our largest trading partners - the United States and Europe - are, effectively, going in different directions.

The United States' hiking cycle will certainly impact the carry trade and the money flow into and out of South Africa. In excess of 30% of our bond and equity market is owned by foreigners. So when foreigners pull out it impacts our capital account deficit, which means pressure on the rand.
Bearing this in mind, what are the implications of rate hikes for local investors in the R350,000 to R1.5m bracket?

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Biggest investments

For many of these private clients, their biggest investments are probably a pension fund, some retirement annuities, and possibly some discretionary funds. What is important is that these clients are earning rands, spending rands and saving for retirement in rands.

The best way for investors to react in the current environment is to remain steady and prudent. If you haven't taken advice, and if you are exposed to single counters or asset classes, then you don't want to overreact during a time of stress. You want to hold on until some sort of normalisation and then look to rebalance your portfolio, diversify risk and ensure you are set up to achieve your long-term goals.

Right now is the time to seek out judicious financial advice and ensure your portfolio is properly and effectively diversified.