According to the Stanlib weekly focus, the ninth interest rate hike in two years, which has raised the prime rate by 43% from 10.5% to 15%, is likely to damage the growth rate of the economy and non-mining company earnings, by “a couple of percent for this year and more for next year”.
Added to which the PE ratio is usually negatively affected by rising interest rates, because of the inverse relationship to rising interest rates; so with the PE and the EPS (earnings per share) both under pressure, share prices will do less well and may even revisit the lows of January/February this year.
That’s not all. Bond yields hit four-year highs today (14 April) so property shares are also negatively impacted. The good news is that investors should be able to accumulate good quality shares and funds at lower prices.
According to Stanlib, thanks to the fact that the Reserve Bank is harpooning a chunk of the country’s growth story, foreign investors may send their funds to other more attractive emerging markets, which implies that the country won’t attract enough funds to offset its current account deficit, which means the rand may weaken further… which in turn could cause higher inflation… and guess what, higher interest rates (the vicious circle).
The house finishes off with the comment that thankfully half of the JSE comprises resource shares, which are largely unaffected by SA interest rate shenanigans.