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What interest rates, inflation and the energy crisis in Europe mean for your investment plan

Published Jul 29, 2022


By Wendy Myers

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Local and global markets continue to experience significant volatility, and these market fluctuations can cause both seasoned and novice investors to worry and question why they are in the market in the first place.

It takes a bold investor to return to the market when their equity portfolio is showing negative or diminished returns, but it is in these times that additional inflows to your investments can help ensure that you continue to make progress towards your goals. Investments guru Warren Buffet famously said that you need to “be greedy when others are fearful”, so now is the time to act and ensure that your investment plan is on track to deliver on your investment goals.

Three important ‘R’ words right now: Russia, recession and rates

The South African economy has entered an increasing interest rate cycle. The SA Reserve Bank’s Monetary Policy Committee increased the repo rate by 0.75% to 5.50% on 21 July, which constituted the fifth consecutive increase since the hiking cycle began last year and is the steepest hike since September 2002.

An increasing interest rate cycle is not good for the local economy, as both businesses and consumers resort to cutting back on spending as a means to cope with the higher interest rates. This will cause corporate earnings to drop and share prices to fall.

On a wider front, global economies are also subject to increasing interest rates as inflationary fears become a reality. Citigroup CEO Jane Fraser perfectly summarised the global situation at the recently held Davos 2022 World Economic Forum by highlighting that “there are three ‘R’ words right now – Russia, recession and rates”.

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These three R’s have already impacted share prices and will continue to do so over the course of the year and possibly even into next year. A recession in Europe is looking more and more likely, as they continue to experience supply chain disruptions and an energy crisis.

What does this mean for investors, and how can your investment plan benefit from these events?

On the upside, the South African equity market has managed to weather these macroeconomic forces better than our global counterparts have, mostly because South Africa is an exporter of resources. This will have an overall positive impact on our currency and our equity markets. The All Share Index (Alsi) returned 3.84% for the first quarter of 2022, whilst the UK FTSE 100 delivered 1.8% and the US FTSE 500 recorded -4.6%. Investors with exposure to South African equities may want to look to invest globally as global share prices pull back as the impact of inflation and interest rates is priced in.

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At PSG Wealth, we advocate a long-term horizon for investing in shares – both locally and offshore. When looking to invest in the market, it is important to understand how the macro economy impacts asset prices. This will ensure you position your investments and your overall plan to benefit you over the long term. If the thought of investing leaves you feeling anxious, it would be wise to make use of a professional adviser who will take the time to understand your risk profile and your investment needs, and help dispel your investment fears. Your adviser will ensure that you feel heard and make sure that your investment plan remains on track, irrespective of the short-term market fluctuations.

Wendy Myers is head of securities at PSG Wealth.