A key take-out for investors from last month’s National Budget is the significant reduction in the debt-to-GDP ratio forecasts; the percentage of state debt in relation to thegross domestic product. Government will generate the most revenue to offset the deficit through the 1% increase in VAT. This focus on fiscal consolidation will see the country return to a more favourable debt-to-GDP ratio. Reignited investor confidence, a projected upturn in the economy and a strong rand amid a low inflation environment, is likely to encourage the South African Reserve Bank (SARB) to reduce interest rates in 2018.
A rate cut, two predicted for this year by Old Mutual economists, will offer the perfect opportunity for first-time investors currently saving money in a bank account to consider investing in a unit trust instead. This is according to Elize Botha, Managing Director of Old Mutual Unit Trusts who says, “While a reduction in the prime interest rate is good for the economy, it isn’t great for South Africans saving money in a bank account. Rate cuts will result in consumers with savings in interest-bearing vehicles to earn a lower return on their hard-earned cash”.
Long-term data compiled by the research team at Old Mutual Investment Group showed that it took 92 years to double the real value of a cash investment, based on historical average return, while equities (shares in companies listed on the stock exchange) needed only nine years to do the same. Yet, according to the 2017 Old Mutual Savings and Investment Monitor, only 2% of South Africans are saving and investing their money in an equity-based investment vehicle.
“Cash is good for short-term needs and provides relative stability, but cash saved in a bank account or fixed deposit is seldom able to deliver real growth over the long term, as opposed to equities, which have proven to outpace inflation,” says Botha.
The Finance Minister also announced an increase to the offshore allocation of funds from 25% to 30%, of which the African allocation has increased from 5% to 10%. “Offshore exposure protects local investors with a large exposure to the South African market against concentration risk, which is the danger that comes with holding all your eggs in one basket,” explains Botha.
“The decision to allow investors to increase their offshore exposure comes at precisely the right time, given the strength of the rand,” she adds.
Another benefit of unit trusts is the financial security they bring. “Unit trusts are ring fenced, meaning that contributions made by investors towards a unit trust remain separate from the unit trust company. Should there be issues with the financial stability of the institution, the investors’ money is protected as it is held by an independent trustee,” says Botha.
“And unlike fixed deposits, investors can access money invested in a unit trust without notice,” she adds.
Botha says the possible reduction in interest rates is also the perfect opportunity for South Africans stuck in a debt trap to pay their liabilities off quicker, thereby allowing them to become financially free. In 2017, the Monitor reported that 16% of household income was going towards debt repayments such as personal loans, store accounts, and credit cards.
“It’s not possible for everyone to become wealthy, but it is possible for most of us to be financially free from debt. Despite how South Africans view their current financial situation, financial freedom and the security it brings is attainable by reducing your living expenses, eliminating loans and ensuring that your income is greater than your expenses.
Botha says, “South Africans with outstanding loans should take the opportunity of lower interest rates, should it arise, to use any savings to pay back their debt as quickly as possible.”
“Our financial aspirations, like each of us, are unique. With a wide variety of collective scheme investment vehicles on the market, there is a unit trust out there that is designed not only to outpace inflation over the long term, but also to meet both your medium- and long-term financial needs,” she adds.