Interest rates may be coming down but the era of free money appears over

What does this mean for portfolios?

Durban, 11 March 2024: Fresh from a market rally in the final six weeks of last year, market participants began 2024 with a degree of optimism as the downward trajectory of inflation, and the potential for interest rate cuts promised to provide some relief for a heavily indebted world. It should be noted, however, that interest rate cuts are normally associated with an economic slowdown. In such an environment, more accommodative monetary policy is needed to stimulate growth and prevent the slowdown from tipping into a full-blown recession.

According to the World Bank, the global economy will grow more slowly over the next two years than it did in the decade before COVID-19 and is set for the worst half-a-decade of growth in 30 years. This seems reasonable given elevated levels of debt, monetary policies which will likely remain restrictive throughout the course of the year, and geopolitical uncertainties which continue to restrict global growth. Further, China’s faltering economy is unlikely to be the growth driver it was in the aftermath of the Global Financial Crisis.

While a global recession may still be avoided, evidence of a material economic slowdown is mounting. This is good news for central bankers determined to reduce inflation, but not for the earnings and dividend growth prospects of companies – the most important driver of share price appreciation over the longer term. Unfortunately, it appears that the trade-off for lower inflation will be stalling growth.

High-quality companies have greater resilience and predictability

So, how does one position portfolios for such an environment? Often in an economic slowdown, it is the high-quality companies that produce business and consumer essentials that serve investors best. These company tend to be less reliant on favourable conditions to produce reliable and growing earnings – unlike resource producers and other cyclical companies. This makes them a far more predictable investment and is precisely why they form the foundation of Marriott’s investment style. Their ability to continue growing dividends during economic slowdowns (and even recessions) is what makes them ideally suited for the months and years ahead.

Although higher rates globally create some challenges for individuals, companies and governments alike, it also presents to investors an opportunity that has been missing for the past 15 years. With First World interest rates currently at multi-decade highs, as evident in the chart below, attractive hard currency returns are possible with significantly less risk.

Tax-efficient investment option

As a result, Marriott is launching two new portfolios within the International Investment Mandate. The Smart International Income Portfolio offers both a US Dollar and Sterling option. Importantly, these portfolios hold their interest-bearing assets via accumulating ETFs and funds – this is highly efficient for South African investors as all income is automatically retained within the portfolios without incurring tax. When 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 for individual South African investors.

About Marriott:

Marriott aims to create financial peace of mind through predictable investment outcomes and personalised service.