close menu

In a world of negative rates, can the Rand rally?

by Anton Van Teylingen | Sep 02, 2016
  • We live in Interesting times indeed. In a world where global monetary policies are out of sync and central banks are experimenting with negative interest rates, it appears that navigating the uncertain road ahead may prove to be more difficult than ever before. Today I’m going to be looking at this new world of negative rates, the search for yield and how South Africa could be doing more to entice international, yield-hungry investors.
    White house

    Money supply, QE and low yields

    A recent report by BlackRock, the world’s largest asset manager, suggested that investors all over the world need to brace themselves for a period of sustained low returns. This is mostly due to decreasing yields and slow global growth. If this report proves to be correct, then the days of consistent double digit returns are well and truly behind us.

    To understand what’s happening in the world economy right now we need to understand what central bank have been up to recently. Key to this is understanding how money supply in an economy is affected by interest rate hikes and cuts. This is best explained by the below graph.

    Graph: Interest rate vs. money supply

    As you can see, the relationship between money supply (MS) and interest rates (IR) is inverse. As the interest rate decreases, the supply of money increases. In the above graph this is represented by the demand for money line (DM).

    When central banks talk about quantitative easing (QE), they are essentially looking to allow this relationship to take effect. Lowering interest rates and buying bonds pumps billions into an economy, with the hope to spur business growth and promote activity.

     

    QE is a relatively new economic stimulus measure and was introduced by the Bank of Japan in the early 2000’s as a means of fighting off persistent deflation. QE was once again used after 2007/2008 Global Financial Crisis by the United States, the United Kingdom, and the Eurozone, as a means to stimulate the global economy.

    QE proved to be an effective enhancement of monetary policy and much of the global recovery over the past decade can be attributed to it. However, it has also pushed central bank interest rates lower than they’ve ever been before.

    Historically, and unlike what is happening right now, interest rates have always moved in cycles. Below you will see interest rates for the United States and South Africa over the past 50 years. The moving average has been highlighted to show you the cyclical nature of interest rate policies and their correlation between countries. 

    interest rate cycle

    Over the past half century, most countries have displayed similar cyclical patterns as global growth spurred economic policy. However today something is happening across the world that could have an exponential effect in years to come: Central banks are pushing interest rates below zero and into negative territory.

    25% of the world economy is in unchartered waters

    The European Central Bank (ECB) first implemented negative rates in mid-2014, surprising global markets by wading into the unknown. Deposit facility rates were set at -0.1% and many economist cautioned against this move due to the uncertainty around how markets would react. Since then, the ECB has cut rates three more times and currently charges depositors 0.4% to hold cash overnight.

    In early 2016, Japan raised a few eyebrows when it adopted negative rates. The Bank of Japan was soon joined by the central banks of Sweden, Switzerland and Denmark as major European players began to join the negative interest rate party.

    In April this year it was reported that about USD$8 trillion of government bonds were offering yields below zero and about 500 million people in a quarter of the world’s economy were living in negative yield environments. These are astonishing figures and are proof that the global economy is currently in a position it has never been in before. These figures are even more astonishing given the fact that the global financial framework hadn’t even considered negative rates a decade ago.

    Earlier this year the Bank for International Settlements cautioned that that rates should not remain negative for persistent periods of time due to the uncertainty around market responses. Only time will tell what effect this will have, what we do know, is that in the decades to come textbooks may be written on the fallout or success from these extreme central bank measures.

    Team USA, bucking the trend

    One other interesting point is that whilst most major economies worldwide are in the process of lowering rates (even below zero), the United States have embarked on a tightening cycle. The Fed is looking to increase rates over the medium/long term. This policy is divergent from the ECB’s and will make for an interesting investment landscape as yield-hungry investors look for opportunity outside of the negative yield zones.

    While the US is the likely candidate for yield seekers, the pace at which the Fed can hike its rate will depend on the pressure this places on the huge amount of debt the US economy carries. The US currently carries an eye-watering estimated USD19.3 trillion in debt. Similar to the ordinary consumer, increasing interest rates mean higher interest payments must be paid, and when dealing with such large amounts you can imagine these numbers can quickly get staggering. The Fed will have to justify any rate increase with even better economic performance to cover the cost.

    Opportunities abound for South Africa, but can they be seized?

    In an ideal world without political risks and interference, South Africa would be incredibly well placed as a lucrative destination for foreign investment. In the weeks prior to the Gordhan vs Hawks saga we proved just that. During this time the Rand was the world’s best performing currency in 2016, we had just held successful free and fair local elections and capital inflows were beginning to make their way into our markets in search of that ever-elusive yield.

    Recent events, however, have unfortunately allowed the situation to once again worsen with politics disrupting economic progress. The Rand is currently at near on two month lows to the US Dollar and British Pound.

    With robust financial infrastructure, South Africa can set itself up as the emerging market investment destination. With our interest rate set at 7%, we can offer investors great return in a world awash with negative rates and cautionary US monetary policy. Unfortunately, selfish in-fighting and cynical political jockeying seems destined to stunt South Africa’s prospects.

    Two years and counting, what does a negative interest rate future hold for us?

    September will prove to be a testing period as the ECB enters its 27th month of negative rates and global equity performance is expected to come under pressure. Dating back to 1928, September is, on average, the worst performing month of the year according to US S&P 500 with returns in the region of -0.5%. Added to this is the run up to the US presidential elections and poor Chinese manufacturing data.

    It appears that no asset class is safe from volatility in the months to come, whilst investors should brace themselves for a new era, as easy returns will be harder to come by. September also sees the commencement of the G20 summit, where everything from energy to agriculture are discussed. Here’s hoping South Africa can showcase itself as an investment destination and leave in a better position than it arrived.


    Anton van Teylingen is Sable’s Forex Operations Manager. Read more about his views on the Rand and emerging markets.

    We are a professional services company that specialises in cross-border financial and immigration advice and solutions.

    Our teams in the UK, South Africa and Australia can ensure that when you decide to move overseas, invest offshore or expand your business internationally, you’ll do so with the backing of experienced local experts.

    • trust-handshake
      But, do you know your forex broker’s name?
      Oct 10, 2018  |  by Saskia Johnston
    • risk-ahead-sign
      Increase your business’s bottom line with currency hedging
      Jun 06, 2018  |  by Calvin Matsaure
    • dollar-euro-birdcage
      Is your forex broker saving or costing you money?
      May 15, 2018  |  by Tim Smith
    • international-money-transfers-globe
      How to choose the right forex partner for your business
      Dec 11, 2017  |  by Saskia Johnston
    • dollar-vs-rand-depreciation
      Uncertainty is here to stay, so how do you roll with the punches?
      Nov 24, 2017  |  by Gary Kockott
    • rand spiral blog
      Can the Rand make a comeback? Or is it too late?
      Oct 20, 2017  |  by Andrew Rissik
    • business-man-chasing-thief
      Scam warning! Australian importers beware
      Oct 18, 2017  |  by Tim Smith
    • Piggy bank and rain
      Protect your wealth from exchange rate volatility
      Jul 12, 2017  |  by Anton Van Teylingen
    • busisiwe-m-and-jacob-z
      Who’s propping up the Rand?
      Jun 21, 2017  |  by Andrew Rissik
    • zuma under questioning
      Making cents of the Rand: Are we at the mercy of Jacob Zuma?
      May 26, 2017  |  by Andrew Rissik
     
     

    South Africa

    Cape Town

    Regent Square
    Doncaster Road
    Kenilworth 7708 +27 (0) 21 657 2120

    Durban

    201 The Annex
    Ridgeside Office Park
    Umhlanga +27 (0) 31 536 8843

    United Kingdom

    London

    Castlewood House
    77/91 New Oxford Street
    WC1A 1DG +44 (0) 20 7759 7514

    Croydon

    5-7 Selsdon Road
    South Croydon
    CR2 6PU +44 (0) 20 7759 7581

    Australia

    Melbourne

    9 Yarra Street
    South Yarra
    VIC 3141 +613 (0) 8651 4500

    Sable International is a trading name of 1st Contact Money Limited (company number 07070528), registered in England and Wales. We are authorised and regulated by the Financial Conduct Authority in the UK (FCA no. 517570), the Financial Services Conduct Authority in South Africa (1st Contact Money [PTY] Ltd - FSP no. 41900) and hold an Australian Financial Services License issued by ASIC to deal in foreign exchange (1st Contact Group - AFS License number 335 126).

    This site uses cookies, read more or close this notice.