Shares and in­ter­est rates go hand in hand

Finweek English Edition - - MONEY - BY SCHALK LOUW

Like cheese and wine; tea and bis­cuits; Sonny and Cher; and Bis­marck and a dis­ci­plinary hear­ing, the eq­uity mar­ket and in­ter­est rate cy­cles also go hand in hand.

On 2 Ju ne, t he Reser ve Bank r e por t e d t hat l ower i ng i ntere s t rates may be a thing of the past (for now). They f eel t hat a mod­er­ate strength­en­ing of the mon­e­tary pol­icy should help to keep inf la­tion in check while not hav­ing too great an ef­fect on eco­nomic growth.

Now the big ques­tion: if in­ter­est rates do rise, how will it af­fect lo­cal share prices? With­out us­ing his­tor­i­cal fig­ures as a pre­dic­tion for the fu­ture, we can use the pe­riod from 1973 on­wards as an ex­am­ple (see graphs).

What’s in­ter­est­ing about th­ese past 42 years is the fact that in­ter­est rates rose 48% of the time, and de­clined 52% of the time – close to a 50/50 sce­nario. Even more in­ter­est­ing is the du­ra­tion of th­ese phases. The av­er­age ris­ing phase dur­ing this pe­riod lasted for 31 months, while the av­er­age de­clin­ing phase lasted for 32 months.

When we con­sider t he eq­uit y mar­kets dur­ing th­ese phases, it is quite strik­ing that we never saw a neg­a­tive mar­ket dur­ing a de­clin­ing in­ter­est rate phase since 1973. On the con­trary, the

Port­fo­lio Manager at PSG Wealth mar­ket bloomed like the Na­maqua­land in spring.

The av­er­age g r owth dur­ing a de­clin­ing i nter­est rate phase was a stag­ger­ing 36% per year, while you would have only earned 0.5% growth on your cap­i­tal dur­ing a ris­ing in­ter­est rate phase. The four graphs clearly show t hat you would have out­per­formed t he money mar­ket dur­ing t he past si x de­clin­ing i nter­est r ate phases (1994-present), while this would not have been pos­si­ble dur­ing a r ising in­ter­est rate phase.

What’s re­mark­able about this the­ory is that if you in­vested R100 in shares only in March 1986, your R100 would be worth R3 966 to­day, com­pared to the R1 837 be­fore tax you would have had if you in­vested in the money mar­ket. If you had only in­vested in shares dur­ing a de­clin­ing in­ter­est rate phase and took refuge in the money mar­ket dur­ing a ris­ing in­ter­est rate phase, your R100 would be worth a whop­ping R12 357 to­day.

At this point, I need to re­it­er­ate the fact that the past serves as no prom­ise for fu­ture per­for­mance.

Newspapers in English

Newspapers from South Africa

© PressReader. All rights reserved.