Markets & Equities

The clash between share prices and interest rates

One of John Templeton’s most famous sayings is “The four most expensive words in the English language are ‘this time it’s different’.” With that in mind, my mom always said that one should never say never, because you might end up quite surprised.

Those of you who have followed my reports over the last 10 to 20 years, will know that I have written about the statistical calculations surrounding the relationship between local share price movements and interest rate movements on several occasions.

In short, the data showed us that since 1991, we have never (sorry Mom) seen money market outperform the FTSE/JSE All Share Index (JSE) during a declining interest rate phase. The contrary also applies in that over the same period, money market has always managed to outperform the JSE during a rising interest rate phase.

Table 1: FTSE/JSE All Share Index ($JALSH) and money market returns over various interest rate cycles (source: PSG Wealth Old Oak, @SchalkLouw & Iress)

By the time you read this, the 0.25% interest rate hike announced by the SA Reserve Bank on 22 November 2018 will be nothing new and based on the size of the hike, perhaps not too significant. But even if it’s just 0.25%, this marks a turning point in the current cycle from a declining one to a rising one, and it shows us that there are indeed some cases which can be classified as “different”.

Following the interest rate drop for the first time since January 2014 in June 2017, I was filled with excitement, because the JSE usually performs relatively well during a declining interest rate phase. Well, not only was this cycle much shorter than the average 34-month cycle, but we had to see share prices fall by 7% while money markets grew by almost 9%. The question on everyone’s lips is whether shares will continue to perform poorly compared to money markets during a rising interest rate phase, or whether statistics will prove us wrong. My answer is quite simply: I don’t know.

What I do know is that we have experienced a very rare event this month: the fact that money market outperformed the JSE over a rolling five-year period (up to the end of October 2018). Those of you who are on pins and needles, thinking that you would have been better off if you had rather invested your capital in money markets rather than the stock exchange five years ago, would probably be right. Statistically, however, even though it doesn’t “never” happen, it remains a very rare phenomenon. Over the last 50 years, we had only 10 noticeable cases where this happened, some of which lasted for a few months and some lasting for no more than one month. My point remains that collectively, it happened only 10 times over a period of 50 years.

The good news is that each time money markets outperformed the JSE over a rolling 60-month period (5 years) over the last 50 years, and you had invested your capital in the JSE at that exact point, you would have outperformed money market every single time in the following 12-month period. But there’s even a cherry on top: if you had invested your capital in the JSE in the first month of the rolling 60-month period for each of the 10 times that money market outperformed the JSE, your average annual return would have totalled 22% per occurrence.

I know that never is a long time and that 0.25% (interest rate increase) has meant the difference between history repeating itself and this time being different, but I still believe that at current valuations, more and more value is starting to emerge in our local stock market, as long as we keep in mind that patience is a virtue.


The opinions expressed in this blog are the opinions of the writer and not necessarily those of PSG. These opinions do not constitute advice.  This is intended as general information and does not form part of any financial, tax, legal or investment related advice. Although the utmost care has been taken in the research and preparation of this blog, no responsibility can be taken for actions taken based on the information contained in this blog. Since individual needs and risk profiles differ, it is always advisable to consult a qualified financial adviser before taking action.

Schalk Louw
As Portfolio Manager at PSG Wealth Old Oak and with over 20 years’ experience in the investment industry, Schalk has consistently delivered solid returns to his clients and has certainly become one of South Africa’s most well-known strategists. He started his career in 1994 at the stockbroking company, Huysamer Stals (later ABN Amro). He joined SMK Securities in 1997, (later became BoE Personal Stockbrokers) and was later appointed as director and branch manager. In 2001 he co-founded Contego Asset Management and managed the company as CEO up to March 2014, after which he joined PSG Wealth Old Oak. Schalk has also become a regular household name with investors, with his reports being published in many of the national press. He completed his MBA in 2008.

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