This week, Finance Minister Enoch Godongwana is expected to present South Africa's 2024 budget allocation to Parliament. Many South Africans will be watching and waiting for good news from the Minister of Finance on budget reforms that will help the already tight fiscal situation.
The economic pain is not limited to South Africa. According to the World Economic Forum's 2024 Global Risks Report, the world system has proven “remarkably resilient” despite geopolitical upheavals and economic conflicts. Still, the forum's Global Risk Perceptions Survey highlights that “the global outlook is primarily negative in the near term and is expected to worsen in the longer term.”
paul counihan chief asset officer Members of South African specialist investment and insurance group Fed Group agree that the level of global anxiety is slightly higher than normal at the moment. He argues that the current level of volatility has been amplified by the rollercoaster interest rate environment sparked by emergency monetary policy intervention by governments during the pandemic. Interest rates were cut to their lowest rates in decades to cushion the economic impact of the coronavirus, but have since been raised quite significantly to curb the high inflation environment.
“In that area, there was no…smooth monetary policy that was deployed globally,” Counihan said. “The ups and downs were intense.”
Persistent high inflation and high interest rates are a huge burden on economic growth, but they also present an opportunity, Counihan said.
Higher yield, lower risk
When investors consider their entire portfolio, it is wise to pursue yield and diversify their overall investments. Therefore, fixed income or structured products that provide stability and income generation to these portfolios have always served to provide a lifeline in volatile situations.
Mr. Counihan points out that given the current level of global interest rates, investors can earn good yields on low-risk investments. For example, last November, the yield on the US 10-year Treasury note hit its highest since the 2007 financial crisis.
In South Africa, the South African Reserve Bank (Sarb) has raised the repo rate (interest rate on loans to private banks) to 8.25% through 2023, the highest level in 14 years.
The Monetary Policy Committee unanimously voted to keep interest rates unchanged in February. There is talk that interest rates will remain high for a long time, but eventually the tide will turn and monetary policy makers will start lowering rates. Mr. Counihan said the consensus is that Saab will begin by lowering repo rates in the second half of this year. When that starts to happen, interest rates effectively approach inflation levels.
Now is the time to look at alternative asset clusters such as structured products, fixed rate deposits and bond options that generate more predictable returns outside of traditional financial market environments, Counihan said.
We are definitely heading into a year of change.
This year is definitely a year of change. No one can predict what will happen over the next 11 months, but one thing is for certain: the scale of the democratic elections scheduled will make governments around the world in their current positions by the end of this year. That means it will be very different.
At least 64 countries around the world will hold national elections, representing approximately 49% of the world's population.
While this is unprecedented, Counihan believes the touted “world election year” should not be the only reason investors turn to fixed investments. It should be part of the conversations investors have with their financial advisors on a regular basis, despite temporary external factors.
He advocates the concept of “asset-liability matching,” which requires investors to understand their financial goals and plan to use current assets to pay for future debts. Essentially, it understands when and where you need the funds (liquidity) to cover the liabilities incurred at that particular point in time. “That's where these more predictable measures become so important.”
alternative asset class
Counihan argues that the term “alternative asset class” does not necessarily mean “volatile or risky.”
“[For us] It's actually a less thought-of alternative asset that can provide predictability. ”
Fed Group has a particular focus on commercial real estate, smart agriculture and renewable energy in South Africa. Although geographically diverse across the country, focusing solely on the domestic environment is a strategic decision for the Group. Because we believe we have the local expertise and knowledge to deliver predictable returns and properly manage risk right here in our backyard.
“We have a good understanding of these three core asset classes,” he says.
Seeking simplicity and long-term commitment
When considering fixed income or structured products, Counihan advises investors to look for products they understand.
“There are countless financial products in the market that are very difficult to understand. Sometimes I even think that most experts will not be able to understand them.”
Counihan says once you find the right product, you need to be able to commit some capital over a long period of time.
“The real investment is usually 3 years. [or longer]. [Anything shorter] I'm saving up for something. ” Most of the asset classes FedGroup focuses on are those with a five-year horizon. Fixed investments also protect investors from reactionary investment decisions based solely on political or economic factors in a given year.
Given the current climate, Counihan believes locking in double-digit returns for five years of predictable interest rates is one of the best decisions investors can make right now.
Brought to you by Fed Group.
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