How to invest when interest rates are low

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The Money Show’s Bruce Whitfield interviewed Ashburton Chief Investment Officer Paolo Senatore.

The first thing we need to do, says Senatore, is differentiate between historically low and even negative interest rates in many developed markets and relatively higher rates domestically.

  • Rates have been structurally low in developed markets since the financial crisis of 2008. They are likely to remain lower for longer due to concerns about growth, amplified by Brexit.

  • This environment tends to be supportive of equity market ratings through elevated price-to-earnings ratios as investors are willing to tolerate lower yields. Look for defensive companies with strong balance sheets and decent dividends to outperform.

  • While bond yields in developed markets trend toward the negative; emerging market bonds (including our own) become attractive in what is known as the “Hunt for Yield”. This has already begun to play out with strength in the local bond market.

  • Locally interest rates have been increasing from the beginning of 2014 when prime was at 8.5% to today’s rate of 10.5%. This, coupled with lower growth and a number of other factors, has put tremendous pressure on the consumer and business in general. There are early indications that the rate hiking cycle in South Africa may well be coming to an end, but investors should be cautious as growth expectations remain subdued.

  • Having said that, the sectors that have borne the brunt of the difficult environment would naturally become beneficiaries if the Sarb reduces rates. Here one would look at banks and financials in general, which are trading at relatively low multiples, credit retailers and South African focused industrials. Investors should exercise prudence and patience as the broad based economic outlook remains fragile.

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