Fixed income investors to continue feeling the pinch – SSS

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Down… The real return on the 10-year government bond has diminished over time. The-10 year government bond yield at the end of May 2016 stood at 10.8 percent while inflation for the corresponding period came through at 6.7 percent. This effectively translates into a real return of 4.2 percent compared to the more robust real return of 6.2 percent in May 2015.

Windhoek

The global financial slowdown seems to have docked in southern Africa and with a higher risk of a recession in South Africa due to weak economic data released in the first quarter of this year, it would seem South Africa will not increase its interest rates again, at least until the last quarter of 2016.

This is according to stock brokerage firm, Simonis Storm Securities (SSS), which in its latest interest and inflation report, which was released this week, says it expects no further rate hikes in Namibia either, at least for the next quarter.

However, SSS warned that based on its expectation of continued higher inflation, coupled with a lower expectation for rate hikes, fixed income investors will continue to feel the pinch for the remainder of the year.

Despite the recent upsurge in inflation the Bank of Namibia (BoN) Monetary Policy Committee on Wednesday kept the repo rate unchanged at 7 percent, a move it said is to continue supporting Namibia’’s economic growth.

At the announcement, central bank governor, Ipumbu Shiimi, said the decision was taken in light of a slow and fragile recovery in the economies of Namibia’s trading partners. “”We are grateful that the repo rate remains unchanged and that the interest rate is now aligned with South Africa,”” said Shiimi.

The SSS report points out that the South African economy contracted by 1.2 percent in the first quarter of 2016, compared to the positive growth of 0.4 percent registered in the last quarter of 2015. South Africa’s mining sector has been pinpointed as the main contributor to the overall degree of contraction (-1.5 percentage points) and this was largely the reason behind the South African Reserve Bank’s decision to leave its repo rate unchanged at 7 percent in May 2016.

“Although we understand that BoN does not consider inflationary target in its monetary policy formulation and that its key mandate is to maintain the one-on-one currency peg with the ZAR and adequate import cover, we wonder at what point investors will start demanding higher returns in this environment. Globally we have been seeing a trend of interest rates being kept lower for longer, thereby penalising investors and rewarding borrowers,” reads the SSS report.

SSS says that regionally it is noticing that central banks are trying to keep economies afloat by keeping interest rates low while inflation is starting to accelerate. The report used South Africa and Namibia as a case in point, noting that a closer examination of the real return on the 10-year Namibian Government Bond versus the repo rate and inflation rates development since 2013 shows that real returns are starting to diminish.

“The real return on the 10-year government bond has diminished over time. This is clearly indicative of the extent to which inflation has eroded the real return on investments …  the 10-year government bond yield at the end of May 2016 stood at 10.8 percent while inflation for the corresponding period came through at 6.7 percent. This effectively translates into a real return of 4.2 percent compared to the more robust real return of 6.2 percent in May 2015,” reads the report.

This latest SSS inflation and interest rate report was compiled by Purvance Heuer, director of securities, Frans Uusiku, economist, and Indileni Nanghonga, trainee economist.

 

 

 

 

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