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Investment Strategy
Friday, December 1, 2006
Interest rate quandary

With domestic interest rates rising, investors might consider re-balancing their portfolios in favour of shares less vulnerable to debt costs.
Although valuations of domestic shares, like their global counterparts, are generally reasonable, one cannot ignore the influence in a further tightening of monetary policy. The Reserve Bank remains committed to its aims to cool robust consumer spending to avoid further pressure on the current account trade deficit and the rand, and the negative effects on inflation.
Sanlam Private Investments (SPI) predicts that the Reserve Bank’s Monetary Policy Committee will impose just one more half a percentage point increase in the repo rate, when it next meets in December. “But,” says chief investment officer William Bowler, “one cannot ignore the risk of further rate increases in the first half of 2007 if economic and financial developments fail to cool inflationary pressures.”
In recent statements the Governor once again highlighted the dangers posed by strong household consumption expenditure and credit extension, the current account deficit, and the tight supply and demand conditions in the oil markets. “If consumer spending and credit growth fail to respond materially to the three interest rate increases since June, or if oil prices reverse their recent falls, be prepared for further tough action in the New Year.”
History has shown that the JSE generally does not like rising interest rates. Of course there are almost always other factors coming into play, such as commodity prices and currency movements, that can distort the picture. The five-year period 1994-1998 saw the prime overdraft rate rise from 15.25% to a high of 25.5% in the midst of the 1998 emerging market crisis. In those five years, the ALSI managed a total gain of only 6.8%. Then from early in 2002 until April 2003 the prime rate rose from 13% to 17%, and the ALSI – pressured also by a global bear market – fell 28%.
This suggests that investors should review the rate-sensitivity of their portfolios. In looking for sectors and shares likely to do relatively better than the market average in a rising interest rate environment, Mr Bowler prefers ‘defensive’ food chains like Pick ‘n Pay to retailers of durable and semi-durable goods. He also highlights potential outperformance by Tiger Brands, Afrox, Barloworld, hospital groups Netcare and Medi-Clinic, and the shares of companies with international businesses that are unaffected by the direction of SA interest rates, notably Richemont and Liberty International.

Copyright © Insurance Times and Investments® Vol:19.6 1st December, 2006
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