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If you're in cash or property, you're smiling.

Posted On Tuesday, 22 April 2003 02:00 Published by
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Even with rates expected to fall, listed property and interest-bearing instruments may still be the best investment, writes Jeremy Thomas.

With inflation not dropping as rapidly as most people expect, the prospect of an interest rate cut before September is looking increasingly unlikely, say many economists.

This is good news for investors who have run for the safety of the money market and unit trust funds that are heavily weighted towards bonds and property.

Robert Walton, managing director of Metropolitan Unit Trusts, says there will always be a place for interest-bearing unit trusts - even though their returns are taxable.

However, few people realise that the first R10 000 of interest received is tax-free, and for individuals over 65 years of age, that amount jumps to R15 000.

If your interest-bearing investment earns a return of 12% per annum, for example, you may invest R83 000 tax-free (or R125 000 if you are older than 65).

"Most money market and income funds should provide you with a 12% per annum effective return nowadays and therefore beat most equity funds hands down. Not only are these funds less volatile, they are also much lower-risk investments with more capital security."

Walton also makes the point that the administration and acquisition fees on interest-bearing funds are usually much lower than those on equity funds.

"This means that you do not have to make up so much lost ground before you start to earn a return on your investment," he says.

With the local equity market down more than 15% in the year to date, the chase for safe returns is on . But, sooner or later bank rates are going to fall, leaving those who depend on interest income with a headache.

Property and bank deposits are currently yielding income of more than 12%, while some bonds earn more than 10%.

Mike Ronald, financial director of the Income Specialists, a division of Marriott, says the wisest course right now would be for cash investors to start considering a switch into listed property.

The consensus is that interest rates will fall over the next 18 months, while inflation is likely to settle at around 6%, he says.

According to research by Marriott, 83% of retired investors depend on income from the cash in the money market.

"This doesn't bode well for bank deposit holders who will now receive less income as their fixed deposits mature and call accounts produce less interest," says Ronald.

However, he says lower interest rates will have no effect on the income produced by listed property and bonds - while capital values of such investments are likely to rise.

Furthermore, he says, if the economy continues to grow it will boost underlying property values - leading to higher rentals which translate into higher income growth for the investor in listed property. Ronald expects returns in the next five years in some listed property funds to be about 15% a year, based on a 12% income yield and an annual growth in income of 2% to 3%.

Business Times

Publisher: Business Times
Source: Business Times
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