Two-pot retirement reform

The South African retirement fund industry will be undergoing a significant change with the introduction of the new two-pot retirement system. National Treasury has published draft legislation to implement these retirement reforms on 1 September 2024.

Accordingly, we are communicating with investors to assist them in better understanding these changes. I have attached a copy of Ninety On’s investor communication for your ease of reference here

Lower Inflation for Longer

Last year, we shared our expectation that global inflation would be heading lower this year, with the caveat that it would be “sticky” on the way down.

In addition to inflation being the silent killer to most client expense budgets, lower inflation rates are usually accompanied mainly by good market conditions for the risk assets of shares and property, locally and abroad.      

Therefore, we keep a close eye on inflation.  

Last week, our Reserve Bank announced that interest rates were unchanged, while further positive news around tax collections was announced, and consumer credit growth came in better than what headlines suggest.

Consumer debt and debt servicing are not hugely stressed. PPI inflation, too, remains low, and we saw an improvement in most food categories, which were at very high levels at the end of last year and are now softening substantially.  

Interest Rates – SA vs Emerging Markets

The past few months have seen the most attention and interest in the US Fed. For us in SA, where we are a net importer of goods and services, offshore inflation is as important as any offshore inflation we import. 

Yet the big action lately has been in Emerging Markets. Chile cut rates by 0,75% last week, where it was one of a group of emerging markets that hiked aggressively in 2021 and 2022 – before the major developed world central banks got going. These are countries with a history of volatile inflation, and they did not wait around and see if what was happening was “transitory” or not (as was much stated in 2022).

Now that inflation has largely subsided – it does appear that it was “transitory-ish” – and so they can cut interest rates.

The aggressive interest rate hikes last year meant that South African short-term interest rates went from being at the top of the range in the peer group pre-Covid to being in the bottom half.  

This is one reason the ZAR currency lagged behind its peer currencies. As these rates come down, the ZAR can unwind some of this underperformance, as we expect over the coming months.

Since SA’s interest rates didn’t rise as dramatically, they aren’t likely to fall much either.

Comparing Emerging Market interest rates since just before COVID-19 to today, it’s evident that most other Emerging Market countries have already started cutting interest rates;

Old Mutual Chief Economist Expectations

Old Mutual’s chief economist, Johann Els, this week, shared his latest views on inflation and interest rates in SA drifting lower as;

Positive Trade Data

Our trade data for February, which saw a R14 billion trade surplus in February, supported the Rand's strength last week. This was a strong rebound from the -R9,7 billion deficit in January.

Improved Tax Collections

This was further supported by improved tax collections, which you may have seen highlighted via social media this week;

Base Case Inflation Scenario

This leaves us with the forward expectations for inflation as;

With the lower inflation rate scenario unfolding Johann Els believes that SA interest rates will most likely be cut by between 1.0% and 1.25% this year.

And from the past, we know that when inflation and interest rates are lower, this historically has seen a stronger accompanying Rand currency (and vice versa).

With a stronger currency, lower inflation and interest rates will favour local SA bonds and share markets.    

FRIDAY FOOD FOR THOUGHT