Interest Rates and What They Mean for the Investor

As wealthy African investors are doubtless aware, interest rates on the continent are, in many cases, at near-record lows as governments try to stimulate economies hard hit by the pandemic and its aftermath. We expect this interest rate scenario to remain relatively unchanged until at least the end of 2021.  

Even though certain economies around the world are now experiencing a quicker-than-anticipated post-Covid recovery, with some associated and potential inflation overshoots emerging in countries such as China, the United States and Australia, central banks in those countries are also likely to keep rates low for as long as possible to continue encouraging business and consumer confidence in the aftermath of Covid-19.  

For some people, the manoeuvrings of interest rates seem like an unfathomable dark art. But they are little more than the efforts of a country’s central bank to stabilise the economy by promoting economic growth as and when necessary (through low interest rates) or moderating excessive growth and consequent inflation (through high interest rates).    

What low interest rates can mean for investing in property 

So, what does Africa’s generally low interest rate environment for the foreseeable future mean for investors? Simply put, low interest rates are a good time to borrow, while high interest rates are a good time for saving. But there are, of course, exceptions. 

Cheap borrowing usually encourages property investing, for example, on the basis that brick-and-mortar is a safe and solid long-term investment strategy. And it certainly can be. But the impact of Covid-19 on jobs, personal incomes and business revenues has increased the risk associated with property, especially as a short-term income stream. This makes it even more critical to undertake proper due-diligence when making a buy-to-rent investment in a global market where the pool of financially stable tenants is under pressure. Similarly so with commercial property.  

This is why Carrick Wealth works closely with seasoned experts when it comes to international property investment, to ensure that considerations such as accessible infrastructure, transport links, schools, shops and recreational facilities are all taken into account. “A property investment should be viewed as a long-term investment,” explains Bradd Bendall, Group Sales Director at Carrick Wealth. “In this case consider capital appreciation, the property’s market potential, rental income, maintenances costs and management fees.” As well as the implications for lower rental yields and interest rate increases on mortgaged properties.  

Be cautious, but look for the potential upsides 

The byword currently is ‘caution’, not ‘avoid’. Should you see a good investment opportunity, be it property or otherwise, that requires you to borrow, now is the time because it is so cheap.  

The early stages of an economic recovery are often favourable to equity investors, simply because the low cost of money can spur an equity market rally. Low interest rates prompt investors to move money from the bond market to the equity market and this influx of new capital causes the equity market to rise. Providing you’ve invested in the right stocks, you can be in for a good ride.  

For investors who favour a bond portfolio, low returns are likely because yields are depressed by the current low interest rates. Low rates equate to low bond yields. Simple. 

But that doesn’t mean high-quality bonds don’t have a place in a well-diversified portfolio right now. Owning fixed income helps to stabilise your portfolio during times of market volatility – which we’re arguably in at present because no one really knows whether Covid-19 still has a sting in its tail – and can provide liquidity while your riskier assets go through their inevitable cycles. 

Should you be structuring for the long or short term? 

In a low rate environment, many experts would argue that longer-term portfolios are preferable because they have a higher risk appetite and therefore a higher allocation of stocks and less bonds. In contrast, short-term portfolios are less favourable because they have fewer stocks and a higher allocation of bonds. 

As always, though, diversification and spreading your risk is critical. Irrespective of current interest rates and where you believe rates will go in the next few years, have a mix of local and offshore investments, plus a considered blend of investment instruments. This approach will help to cushion you from interest rate fluctuations, among other things, and allow time to adjust your portfolio to changing market conditions. 

Past vs present: Repo rates from selected countries 

At 7 June 2021 January 2019 

Europe (ECB) 0.05% 0% 

Kenya 7% 9% 

Mauritius 1.85% 3.5% 

Mozambique 13.25% 14.25% 

Namibia 3.75% 6.75% 

Nigeria 11.5% 14% 

South Africa 3.5% 6.75% 

United Kingdom 0.1% 0.75% 

United States 0.06%  2.40% 

Zambia                 8.5% 9.75% 

Zimbabwe 40% * 15% (March 2019) – 70% (September 2019) 

Source: Trading Economics, Bank of England, YCharts, European Central Bank