Lesetja Kganyago, governor of the South African Reserve Bank. (Getty)
  • If the Reserve Bank starts to cut rates in July - and history repeats itself - better times may be ahead for the local market.
  • Over the past half a century, South African shares have never failed to enjoy strong gains in declining interest rate cycles, an analysis by a portfolio manager shows.
  • For more stories, go to Business Insider SA.

It will be a massive surprise if the Reserve Bank doesn’t cut rates when the monetary policy committee announces its decision on July 18th.

The evidence in support of a cut is overwhelming: the economy is bleeding, inflation remains in check, the chairman of the Fed has confirmed that the US will cut rates soon, and the rand is looking well-behaved.

If South Africa’s experience over the past 46 years repeats itself, if the cut is followed by more decreases, it could signal the start of strong gains on the JSE.

Since 1973, the local market has always seen strong gains when during a declining interest rate  phase – without exception, an analysis by Schalk Louw, portfolio manager and strategist at PSG Wealth Old Oak, shows.

A declining interest rate phase is the period when rates move from a high to a low point - in the past 46 years, these periods lasted on average 32 months in South Africa. Rising interest phases (when interest rates are increased) spanned average periods of 31 months. 

“When we consider the equity markets during these phases, it is quite striking that we never saw a negative market during a declining interest rate phase since 1973. On the contrary, the market bloomed like the Namaqualand in spring,” says Louw.

The average growth during a declining interest rate phase between 1973 and 2015 was a staggering 36% per year, while you would have only earned 0.5% growth on your capital during a rising interest rate phase.

The following graphs show that you would have outperformed the money market during the past six declining interest rate phases, while this would not have been possible during a rising interest rate phase.

From July 2012 to March 2016, when interest rates rose, the JSE’s all share index delivered an average gain of less than 4% a year (15% over the period) , below inflation.

Since then the Reserve Bank has zig-zagged on rates, with no clear rising or declining phase:

Repo rate (SA Reserve Bank)

During this time, share prices have been struggling, and the JSE is now lower than a year ago.

Louw believes that if rates do start to decline from next month, and a declining cycle starts in earnest, this could shift the market’s trajectory.

“Whether you believe in historical movements or not, shares and interest rates clearly go hand in hand.”

Receive a single WhatsApp every morning with all our latest news: click here.

Also from Business Insider South Africa: