By: Scott Cooper, Investment Professional, Marriott Investment Managers
As the year has unfolded, many central banks have faced increasingly difficult interest rate decisions. On one hand, cutting too soon could lead to increased optimism, accelerating economic activity, and risk the reemergence of the inflation. On the other hand, maintaining restrictive monetary policy for too long could trigger a recession.
Although economic activity in the USA has remained resilient over the past four years, the first cracks began to emerge at the beginning of August this year when headline unemployment increased to 4.3% – its highest level since October 2021. This, coupled with low consumer confidence and disappointing job creation figures for the month of July, sent shudders through global markets, led by Japan’s Nikkei 225 stock index which fell more than 12% in a day. However, markets have since rebounded as subsequent US economic data has provided some much-needed reassurance of a ‘soft landing’.
The timing and steepness of potential interest rate cuts will continue to be a key focus of global markets as the year progresses. Although the European Central Bank and Bank of England have each implemented one 0.25% cut (in June and August respectively), monetary policy remains firmly in restrictive territory. Further, despite expectations at the end of 2023 that interest rates in the US would fall by 1.75% during 2024, the Federal Open Market Committee is yet to act. As a result, global rates have remained at 15-year highs in all three regions.
These elevated rates have presented investors with an opportunity that has not been seen since the Global Financial Crisis – the ability to earn attractive hard-currency returns with far less risk. To help investors take advantage of this opportunity, and in the most tax- and cost-efficient way possible, Marriott has launched the Smart International Income Portfolio (SIIP) – a simple, low-cost investment for conservative investors looking to achieve hard-currency returns above bank deposits in either US dollars or sterling. Pleasingly, both the Smart Dollar and Smart Sterling portfolios have performed strongly since inception and currently have a gross weighted average yield to maturity of approximately 5.4% and 5% respectively.
Importantly, all interest-bearing assets are held via accumulating ETFs and funds. This is highly tax- efficient for South African investors as the income is automatically retained within the portfolios without incurring tax. If capital is required, the investor can simply repurchase the required amount. Although a tax charge is triggered at this point, it will be subject to capital gains tax as opposed to income tax – providing a large tax saving (up to 27%) for individual South African investors.
Looking forward, although major central banks are likely to take steps to reduce rates in the second half of 2024, the trajectory is likely to be gradual, with interest rates remaining in restrictive territory until inflation is sustainably back at their 2% targets. As a result, Marriott’s SIIP is well placed to provide investors with attractive hard-currency yields in a highly cost and tax-efficient way for the foreseeable future.
The two SIIP portfolios can be accessed via the International Investment Mandate (using your annual individual offshore allowance).
