South Africa set for interest rate cuts – what it means for investments

The South African Reserve Bank (SARB) is expected to cut interest rates in September, which could boost several asset classes.

In its July meeting, the Monetary Policy Commission (MPC) decided to keep the repo rate steady at 8.25%, a 15-year high. However, two of the six members called for a 25 basis point cut.

Lower inflation has boosted the potential for an interest rate cut, with CPI dropping from 5.1% in June to a three-year low of 4.6% in July.

Moreover, the rand has strengthened following the formation of the Government of National Unity (GNU) between the ANC, DA, IFP, Rise Mzansi, Good, PA, UDM, Al Jama-Ah and FF Plus.

The US Federal Reserve is also expected to cut its interest rates amid lowering inflation and weak job numbers, giving the SARB scope to cut without hurting the interest rate differential.

Bank of America, Nedbank, Standard Bank, Investec and the Bureau for Economic Research (BER) believe that the SARB’s MPC will cut the repo rate by 25 basis points in September.

The BER noted that a 50 basis point cut is also possible depending on the rand exchange rate and its inflation expectations coming out on 12 September, a week before the MPC meets.

Bank of America and Standard Bank believe that 50 basis points worth of cuts will occur in 2024, followed by another 50 basis points in 2025.

Where to invest

Efficient Wealth said that with the growing expectations of local rate cuts, investors are looking at the potential impact on their portfolios.

“Lower interest rates reduce the cost of borrowing, stimulating economic activity and boosting consumer spending,” said Efficient Wealth.

“However, it also reduces the return available on savings. Although just one of the factors impacting asset returns, rate cuts typically prove negative for cash investors while benefitting bonds, equity, and listed property.”

Bonds benefit from the inverse relationship between interest rates and prices.

As interest rates fall, investors are willing to pay more for bonds that offer higher rates than the overall market rate, increasing prices.

For equities, the expectation of future earnings is a crucial driver of share prices.

Lower interest rates can increase company revenue and profits via higher consumer spending and lower borrowing costs.

“However, the impact can differ depending on the specific market sector. Financial stocks tend to suffer from lower interest rates as they reduce the profit margin of banks and other lending institutions,” said Efficient Wealth.

“On the other hand, consumer discretionary stocks (such as Shoprite and Mr Price) tend to benefit as lower interest rates increase the disposable income and spending power of consumers.”

Listed property tends to benefit as lower rates lead to lower interest costs and increased spending at commercial properties.

The picture does not always show an obvious relationship when looking at historic returns.

“Certain inferences can be drawn from analysing past results, such as equities tending to outperform during cutting cycles, cash performing better during hiking cycles, and bonds typically reacting
ahead of announcements – outperforming before cuts and underperforming before hikes (not necessarily during),” said Efficient Wealth.

“But for investors, it is important to consider the significant impact of cycle-specific variables such as starting valuations, structural imbalances, asset-specific metrics, and the level of cuts or hikes implemented when concluding.”

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