How the US Fed hike could impact SA markets

In anticipation of the US Federal Reserve bank hiking its benchmark Fed Funds interest rate, the first rate hike in the US in almost a decade, the South African Reserve Bank took proactive action by hiking the interest rate by 25 basis points at the last Monetary Policy Committee meeting. This was an attempt to lessen the residue effect that the hike would have on the South African market.  

Some economists believe that the reaction of the US equity markets to the hike in the US interest rates will be one of the most crucial influences on South Africa’s financial markets this year. Fed Chair, Janet Yellen had prepared the financial markets for the rate hike by describing the contraction in the US GDP during the first quarter of the year as transitory. The rate was already expected to rise in September this year, however the rate increase was pushed back to the end of the year. 

Adrian Goslett, Regional Director and CEO of RE/MAX of Southern Africa, says that the US has a major impact on the markets around the world, pointing to the sub-prime crisis as an example. “Often the monetary policies of the US Fed have a knock-on effect, with investors closely watching the US markets. While there are currently not that many US investors in South Africa when compared with some other emerging markets, the hike in rate is likely to increase investment interest in the US, with many choosing to take their money out of foreign countries and place it back into the US markets,” says Goslett. “Although year-to-date foreign investors have bought approximately R8.5 billion worth of SA bonds and around R22.9 billion in equities, data has shown that the percentage of non-resident owned SA government bonds has dropped to its lowest level in 18 months due to a loss of appetite ahead of the Fed’s expected interest rate hike. Now that the rate has been hiked this trend is likely to continue.” 

South Africa, along with other emerging-market economies will have to adopt measures that will both attract and retain foreign investment interest. 

According to economists, while the interest rate hiking cycle is likely to bring about a correction in US and global stocks, the correction will only have a mild impact on long-term investors, who should not be deterred. Property for example, will be far less impacted by the change as mortgages are not entirely dependent upon the Fed rate. Even with the increase, the overall rates will still be well below historic averages and it is anticipated that a slight increase will not have much impact on property sales in the US. The National Association of Realtors still forecasts that existing home sales in the US during 2016 will increase to 5.5 million from an anticipated 5.3 million in 2015. This is largely due to the fact that property investors do not solely base their decision on mortgage rates, but also take into consideration factors such as location, price, size and proximity to amenities. 

Goslett says that investors who have purchased property, which is viewed as a long-term investment, should remain invested rather than attempting to time the market. “While the property market experiences cyclical phases, property investments are far less volatile than other investment vehicles such as the equity and share markets, proving to be a solid asset class in which to invest over the long term,” advises Goslett.  “Although there are sometimes unexpected factors that can impact on the property market, generally property price growth is fairly consistent over time. This makes it easier to more accurately predict the potential return on investment with a property purchase as opposed to any other investment class. Unlike other investment options, there is no need for a property investor to constantly be watching the market to see exactly the right time they need to sell to make a profit,” he says. 

Goslett notes that with the US Fed increasing its rate, which will place pressure on the rand, and inflation expected to rise over the silly season due to excessive spending, it is likely that the South African Reserve Bank will continue on its hiking cycle. South African consumers can expect further interest rate hikes during the first half of next year. “Although interest rates have recently increased and are expected to go up further in the near future, rates are still relatively low when compared with the rates seen post-recession - in June 2008 the prime interest rate was 15.50%. It will be sometime before South African consumers see a rate that is even close to that,” says Goslett.

He urges consumers and prospective property buyers to focus on reducing debt levels and increasing their savings. “Those with low or no debt and savings in place, will see the rate hiking cycle in a far more positive light. Reducing debt will give prospective buyers the best opportunity to get into the property market. It is important to remember that despite rising interest rates, property will remain a sought-after asset class in the future and a key building block to personal wealth,” Goslett concludes.