United States inflation fell to 3% in June, the lowest in three years, as increased interest rates started to bite. This easing in CPI has lifted hopes that the current trend will cool rising interest rates. But what does all this mean for a South African investor? This week on the Fantasy Fund Manager podcast BizNews’ Stuart Lowman was joined by Corion Capital’s Garreth Montano and Grant Morris, a portfolio manager at CluclasGray Asset Management, to try to answer this ever-changing scenario. With a scope on which sectors and stocks may benefit from a dovish interest rate environment and a stronger Rand. Education is one of the cornerstones of Fantasy Fund Manager, and Gareth explained this week the dividend ratio and how it is used in investment decision-making. Remember to make your picks each week by the market open on Monday to have a chance to win any of the prizes up for grabs. And invite your friends. Register at www.fantasyfundmanager.co.za—thanks to our platinum sponsors Sharenet, Terebinth Capital, ClucasGray Asset Management, and Money Better. Remember to subscribe to the podcast so you don’t miss an episode.
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In this week’s Fantasy Fund Manager podcast, host Stuart Lowman was joined by Corion Capital’s Gareth Montano and Grant Morris, a portfolio manager at CluclasGray Asset Management.
The conversation began with Stuart asking Gareth about the competition’s progress and the current market conditions. Gareth expressed relief at being back on the podcast and hoped to bring some positive news while David Bacher, their colleague, took a break. Despite the challenges, Gareth noted that a good market performance had lifted everyone’s spirits.
Grant chimed in, acknowledging Gareth’s sentiment and highlighting that June had been a much better month for investors. He attributed the positive trend to alleviation from the volatility experienced in May and a sense of sensibility returning to market valuations. However, Grant believed there was still a way to go before complete stability.
Stuart shared his experience of the market’s ups and downs, mentioning how he had briefly been in the top five on Monday but had dropped significantly since then. He marvelled at the daily market volatility and how quickly one’s position could change.
The discussion turned to the strength of the South African rand, with Grant explaining that the currency had performed well due to positive global factors. The US inflation rate had come in at 3%, signalling a potential end to the tightening cycle by the Federal Reserve. This news benefited emerging markets, including South Africa, and commodity-based currencies.
Stuart pointed out the contrast between the current rand strength and the high inflation of the past. Gareth clarified that the rand’s performance was not solely influenced by domestic factors but also by global market dynamics, particularly in developed markets. As indicated by the US dollar’s movements, the sentiment in developed markets influenced investment decisions in emerging markets.
The conversation delved further into the relationship between global and local interest rates. Gareth emphasized the importance of monitoring global interest rates, especially when comparing them to South African rates. Higher interest rates in developed markets could attract investors away from emerging markets, affecting currencies and asset prices.
Grant joined in, discussing the role of the South African Reserve Bank in maintaining interest rates. He noted the importance of controlling inflation and ensuring stability in the economy. While it may seem challenging to have restrictive interest rate policies during weak economic conditions, it helps maintain stability and offers potential rewards when inflation and rates stabilize and begin to decline.
Stuart then shifted the discussion to the investment landscape and asked Grant about his approach as a Fantasy Fund Manager. Grant highlighted the attractiveness of interest rate-sensitive equities, such as banks and retailers, in a lower interest rate environment. He believed these sectors would benefit from better inflationary trends and a more supportive backdrop.
Stuart asked if specific stocks caught Grant’s attention. Grant mentioned Standard Bank and ABSA as potential beneficiaries. Gareth expressed his agreement, emphasizing the importance of dividend yields in determining the risk-reward payoff for investors. He highlighted the potential rewards of South African stocks that earn significant earnings from the local economy.
The conversation then turned to dividends as an investment approach. Gareth explained that dividend yield, the dividend paid out as a percentage of the share price, was an essential consideration for investors. High dividend yields, particularly in the banking sector, provided attractive risk-reward opportunities, especially considering the after-tax benefits.
Grant added that dividends were an important component of total returns and looked for companies that could grow their dividends in real terms, keeping pace with inflation or exceeding it. This growth helped investors preserve their purchasing power and achieve returns that outpaced inflation.
As the podcast neared its end, Stuart asked for an investment tip. Grant recommended ABSA, emphasizing its potential upside and attractive valuation. Gareth expressed his agreement, having already included ABSA in his portfolio.
The podcast concluded with optimism about the strength of the rand and its positive impact on market sentiment. Gareth and Grant believed South African stocks presented significant investment opportunities, especially those focused on the local economy.
Read more:
- FFM podcast ep10: The winning formula
- FFM podcast ep9: A battle royale for June; the psychology behind value and growth investors; Richemont’s runway
- FFM podcast ep8: Volatility for starters; SA Inc for mains; and Life for dessert
