Most of us began the week not in the best of condition. We had been up ‘til all hours the previous night supervising the Masters golf beaming in from far-off Atlanta And the rest of the week sort of bumbled along in cruise mode – well perhaps more coasting downhill than exactly cruising. Until late Thursday afternoon when Governor Mboweni’s bimonthly TV appearance suddenly became more electrifying than his choice of tie. Just as in August, from out of nowhere, a rate cut of 50 basis points was dropped in our laps.
Immediate market reaction was as if a particularly venomous and ill tempered serpent had slithered up its trouser leg. Amidst the shouting and yelling and frantic slapping at the body parts, the currency went off a cliff and the share price charts took off like the space shuttle. However, this morning, things calmed down a lot, almost to the point of torpor.
The text books probably tell you that lower interest rates should be good for share prices, the property market and pretty well anyone borrowing money. The argument continues that foreigners especially, will dislike the lower rates of return on their cash and sell rands in favour of some other currency. It does seem to be working so far as the rand is down at least 1% against all major currencies and 2.5% against the USD this week. This swooning currency is just what the SARB needs to please exporters and placate local manufacturers trying to compete against cheap imports. It is only us elderly citizens trying to live on our savings who seem to be unhappy about rate cuts!
However, it is as ever, all much trickier than that. Wall Street has seen some fairly sharp down days and more and more commentators are starting to talk about the things that have worried me for so long. Firstly I don’t think that the rand will begin a serious weakening phase from here. It didn’t after the last cut in August. In fact it strengthened to the point where the citizens were threatening toyi-toyi sessions again. Secondly, I think that my long awaited bear has definitely emerged from hibernation in the US. It has been my tedious view that here in SA we will be unable to resist his depredations when that happens – regardless of what the rates are doing. The way the market sulked and the rand began to recover today was very interesting.
Note that the prices of the popular banking sector preference shares should not show too much reaction to the rate cut. Obviously the nominal coupon rates of all of them will now decline by the appropriate fraction of the 50bp cut in the prime rate. But the effective dividend yield of the prefs must now be compared to alternative investments that themselves will now be yielding half a percent less than they used to.
Keep an eye on Sunday’s London Marathon for an SA flag flying from a rhino’s horn. Inside will be a very good and but quite crazy friend of ours raising money for preservation of the species. He would welcome your sponsorship on www.justgiving.com/rhinothomas
James Greener
15th April 2005
