Global central banks have eroded “store-of-value” characteristics from traditional financial markets, such as cash and bonds, leaving investors to rely on property and equity as quasi-store-of-value instruments. Negative interest rates raise the attractiveness of the age-old store of value, gold, and the store of value for the digital age, Bitcoin.
Rather than hold cash, we could hold short-term interest instruments. If the instruments yield interest above inflation, we know that our savings can beat inflation. Real interest rates (interest rate less inflation) in the US and South Africa have gradually trended lower, reducing the ability to store value in these short-dated interest instruments. South African investors could store value in rands, but they assume currency risk in this scenario.
Alternatively, we could purchase longer-dated debt instruments (bonds) issued by governments or corporates. If the real bond yields (yield less inflation) are positive, our value might be maintained relative to inflation. It makes sense but the uncertainty and risk increases notably at this point. What if inflation rises? What if government credit risk deteriorates and the bond loses value?
Bond yields are close to record lows across the developed world despite record high debt levels, so the probability that these assets will hold their value over the coming years is low. South Africa isn’t in nearly as an extreme situation as the developed world, but the trend is the same: lower rates, lower growth, higher debt and deteriorating credit risk.