Attractive investment opportunity
In my previous article I indicated that most investors in Namibia prefer conservative investments, which means they have a strong preference for more secure investments. Most interest-generating investments falls into this category such as bank deposits, money market unit trust funds and treasury bills.
With interest rates as low as they currently are, many investors face difficulty maintaining their standard of living or even just retaining the purchasing power of their investments. We must remember that inflation in Namibia currently stands at 3.9% and 4.4% in South Africa. The rates of most interest-generating investments are lower than inflation, which means that the investor's capital stands to decrease in real terms each year. In such negative real interest rate circumstances such investors become poorer and poorer each year. To make matters worse, interest rates do not appear to be rising rapidly. On the contrary, in South Africa, the private sector credit growth is negative for the second consecutive month – and with negative credit growth, there is almost no chance of interest rate increases.
I indicated last week that long-term government bonds currently offer good value relative to other interest-bearing instruments. Current rates of these products range from 5% on the short side up to almost 13% per year on the long side. Remember, this return is exempt from income tax for Namibian individual investors in terms of the current legislation. The other advantage of this investment is that the rate is fixed, so regardless of whether interest rates in the market decline again in the future, this rate at which the investor buys it is fixed, and the interest income the investor earns is unchanged.
However, one risk to investors with such a fixed rate investment is interest rate risk. This is the risk that interest rates can unexpectedly rise significantly and which will reduce the return you earning relative to the market. Should you then sell the fixed rated investment, you could make a capital loss.
This is perhaps where the other type of long-term bond is a safer option—one whose rate is directly linked to Namibia's inflation, namely an inflation-linked bond. The way it works is you as investor buys the bond at a margin above inflation, and as inflation rises, the bond's rate increases. Also, as inflation drops, the bond's rate of return decreases. Your return on the product will always be that fixed margin above inflation – so you are assured of a real income. And because we know that interest rates and inflation are moving together very closely, you can rest assured that the return will increase on your bond if interest rates rise. And the margins above inflation at which investors can buy these bonds are currently very attractive – on the longer side, this margin is more than 7% above inflation, which means with the current inflation at 3.9%, the growth is around 11% per annum – again without tax playing a role.
To learn more about this, contact us in Windhoek at 2991950 or visit our website at www.cam.com.na.
