A while ago I wrote an article trying to explain why lower interest rates should drive up asset prices. I quite sure you won’t remember the article as you probably fell asleep while reading it.
The article explained how future business profits are discounted back to a present day value to determine a share price. If you use a low interest rate to discount future earnings, then the present-day value is higher and vice versa if you discount with a higher interest rate your share price is lower. Yawn………..
This is what Warren Buffet had to say about the same topic at his annual shareholder meeting. I quote, “Interest rates are to asset prices what the apple is to gravity”. Low interest rates will drive up asset prices, just as higher interest rates will drive down asset prices. And the lesson for Mark, keep it simple stupid (Kiss).
If interest rates do have this “gravitational” influence on asset prices no wonder every Tom, Dick and Harry spend their days analysing every word Mr. Jerome Powell, Governor of the US Federal Reserve, utters from his mouth. And here in SA every Fanie, Thabo and Willie hang on the lips of our very own Governor Lesetja Kganyago. So, what are they saying?
Well it looks like we are in for lower interest rates in SA, while the US are heading in the opposite direction with the Fed expected to hike 4 times this year. Usually if the Fed increases i-rates this puts pressure on SA rates to follow suite, however the “Ramaphoria” effect of our new President has seen the Rand strength materially, which when combined with the recent fiscally responsible budget will allow Mr. Kganyago to announce a cut in the repo rate later this month and most likely followed by another in May.
This should support the economy as the interest rate saving feeds through into higher personal consumption expenditure (PCE). Of-course Moody’s can still ruin it for us, although the market seems to think we have avoided the much-feared downgrade, which is due to be announced on the 23rd March.
For global investors rising interest rates does not bode well for future share prices.
Mcomm, CFP®, HdipTax
T. 021-851 3746