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Last Thursday, the South African Reserve Bank’s (SARB) Monetary Policy Committee (MPC) met for the last time this year.
They decided (unanimously) to keep the repo unchanged at 6.5%.
This despite very low inflation and simply terrible growth rates.
And, while I believe there may have been room for a cut, what the decision has done is made one investment class more attractive than all the rest.
This asset class, often called “only a parking spot” is often overlooked by retail investors because it doesn’t offer the glamour or excitement of shares and property.
Yet, over the last couple of years fixed income investments (I’m talking cash and bonds) have actually outperformed other local asset classes.
Just look at the table below.
It illustrates the real historic returns of fixed income, property and shares after inflation and shows you just how impressive fixed income investment returns have been over the past five years in comparison to the ‘sexier’ asset classes.
Remember, these are “real” returns so you can add the inflation figure back to get the actual return you’ll receive in your bank account.
So, this means you’re looking at official annual fixed income returns of 8.4%, with very, very low risk, paid into your bank account on a regular basis.
An amazing investment anomaly has presented itself – and here’s why…
In “normal markets” holding cash and bonds usually means you will underperform relative to shares or property. But South African markets are currently far from normal.
As the table above shows you, not only have the returns on fixed income more than doubled versus their historic average, returns from both property and shares are currently well below their normal levels. The current real return on some bonds are 6.1%, which rivals the longer-term return on shares –all without the associated market risk!
Now you may be tempted to believe this just illustrates shares and property are incredibly cheap and obviously due for a rebound. And that may be true but, given the fact that the Reserve Bank has lowered its SA GDP growth forecast to just 1.4% in 2020, this rebound seems unlikely. Personally, I’d be surprised if we can manage to get close to this number.
Without a growing economy, shares and property will stay depressed for some time to come.
I agree, returns on certain fixed-income investments would fall if the Reserve bank tries to boost growth via interest rate cuts but, as the SARB governor mentioned in his speech, they are currently being held back by fears of SA credit ratings downgrade.
And, while that Sword of Damocles hangs over South Africa’s head the unusually high returns on fixed income instruments will stay in place. And, should the sword fall, and our credit rating be downgraded to junk, it is likely these fixed income returns would actually increase even more!
This is NOT a get-rich-quick scheme.
This is NOT a get rich slowly thing either.
So, how do you maximise your fixed income benefits?
Before you jump straight in, I must warn you: There is one downside to investing in fixed income assets: Tax!
The SARS only gives investors a small annual exemption on interest income. After that point, your returns are added to your income for tax purposes. So, you need to take this into account when making your investment decisions.
There are plenty of ways to avoid this tax pitfall, either through correct structuring, wrapped investment vehicles or clever allocation. Unfortunately, tax planning is a very personal exercise and every person has unique needs and circumstances.
The good news is, if you’re looking to maximise and optimize your fixed-income investment strategy, I’m happy to help.
Rand Swiss, Wealth Manager