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Equity changes house view on Prime Rate for 2004:
No longer expect a prime rate hike in 2004 (previous expectation was for a 1% hike)
Because of stronger-than-expected rand and its beneficial effect on inflation
Inflation is trending higher, but the outlook is positive assuming very modest rand depreciation from this point.
Inflation expectations have fallen (countrywide) and wage demands have moderated somewhat.
The Reserve Bank appears willing to look through a possible temporary spike in inflation to just above the 6% target.
The main risks to interest rates are currency weakness and excess retail credit.
What does this mean for Fixed Interest/Property fund investors?
Unquestionably positive for SA bonds and listed property shares.
A flat prime rate in 2004 would mean that inflation is less of a problem than originally
thought and this should have positive implications for the bond market.
Bond prices have risen sharply of late (yields have declined sharply).
As of Friday afternoon the R153 benchmark bond that matures in 2010 was trading below the important 9.8% resistance level (at 9.75%). If it closes below 9.8% on Friday, then technically the bond bear market (rising yields, falling prices) is
considered over, per Murray Morrison of JP Morgan.
A look back to
26 June 2004
That would imply a good buying opportunity for the STANLIB Bond Fund (higher risk/higher return) as well as the STANLIB Multi-Manager Bond Fund.
Also a good buying opportunity for the STANLIB Income Fund and Multi-Manager Income Fund (lower risk/lower return) and the newer STANLIB Flexible Income Fund.
Although the Equity house view is only predicting an 8% total return for SA bonds over the next 12 months. This comprises a running yield (income yield) of 10.8% and a possible capital loss of 2.8%, assuming the R157 11 year bond ends the 12 month period at 10.6% (currently 10%).
Prime is still expected to rise by 1% in 2005 and in the following two years thereafter to fall to 10.5%.
Property funds should also benefit from the stronger bond market:
Because bond yields and property share yields follow one another fairly closely, this should also be a good buying opportunity for the STANLIB Multi-Manager Property Fund.
The dividend of the STANLIB Multi-Manager Property Fund for end June was 42% higher than the previous quarter’s dividend and also much better than the 30% forecast predicted by Malcolm Holmes.
STANLIB Property Income Fund manager, Mariette Warner, is predicting that property funds will outperform bond funds again over the next 12 months. Her forecast is for a total return of 15%!!
This is partly based on the better-than-expected increases in the profits of the property companies and therefore the dividend increases that are being granted.Also it appears that a number of pension funds are re-assessing their asset
Allocation decisions and allocating more to property shares.
Equity’s house view remains that the currency is overpriced against a basket of currencies representing our major trading partners, by about 15%.
Forecasting the rand has become a lottery and 99% of forecasts have been wrong, calling for a weakening rand when it continues to rise.
Meanwhile the good news continues to roll out for SA and the rand: VW announcing new car exports of R4 billion per year, the highest car sales for the month of June in 19 years, better inflation figures etc.
Chartist or technical view:
Chartists such as Murray Morrison of JP Morgan indicate that the rand may move towards 5.80 to the dollar if the currency closes below the 6.25 level (ie stronger than) by Friday’s close of business.
The safest course is always to diversify between asset classes. With offshore Managed Future funds as an obvious choice. Why not have a look at the fund offered by American Diversified Funds?
Financial & Industrial shares look good for next year:
STANLIB Asset Management is forecasting a capital return of 20% for the financial and industrial index, plus a 4% dividend yield for the next year, making a total return of 24%.
The All Share Index is expected to give a return of 17% in the next 12 months as resource shares struggle under the impact of the stronger rand.
Asset Management’s model of the All Share Index shows an undervaluation of about 5% currently.
May secure and profitable investment choices be yours.
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