The JSE continued to reach record highs in the second quarter of 2014, despite poor economic growth and low investor sentiment. Various financial institutions are worried that equities are overpriced and economists and financial advisors expect further small increases in the Repo Rate to significantly hamper growth, after two hikes already this year. The record highs are a symptom of the quantitative easing (QE) that has flooded the world with cheap money looking for a home. As QE is pared back and global interest rates resume more normal levels, the JSE will start to reflect pricing more in line with business prospects, which are currently low in SA. The Dow had its first serious drop last week, falling almost 2.5% in 2 days, with the Chicago Board Options Exchange Volatility Index jumping 34% last week, the most since January. The JSE ALSI has also shown volatility and broke its upward trendline last week.
We have been tracking the R186 (expiring 2026) and the R204 (expiring 2018) over the past few months, and have noticed a clear drop in these rates since May 2014 (see attached table). This is partly attributable to the South African Reserve Bank’s short-term rate increases, giving the market confidence in their anti-inflation stance. 5 year fixed rates are currently at a premium of 2% above variable rates and this supports our past recommendation not to fix any long-term borrowings at this stage. Should long term rates continue to decrease in the short-term, there could be an opportunity to fix long-term borrowings in future.
Two years ago we predicted the reduction in property capitalisation rates which has now run its course resulting in higher property values. Market rentals in the areas where we purchase commercial property have finally commenced their upward trend as predicted in our Property Review, which will be supported by rising building costs and the weaker rand. There is therefore an opportunity to move profits made on the JSE to property investments. We have a few good commercial property opportunities and are busy with several exciting residential developments. If you are interested in expanding your property portfolio, please get in touch with us so that we can let you know of opportunities as they occur.