Low inflation is bad for property returns.

Posted On Tuesday, 29 July 2003 02:00 Published by
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It is simplistic to assert that one asset class is better than another, property economist Erwin Rode told the Personal Finance/Fairbairn Capital Investors Club in Cape Town recently. Choosing the "right" asset class depends on the trend in the inflation rate.
By Laura du Preez

It is simplistic to assert that one asset class is better than another, property economist Erwin Rode told the Personal Finance/Fairbairn Capital Investors Club in Cape Town recently. Choosing the "right" asset class depends on the trend in the inflation rate and the trade-off between risk and returns.

We can no longer invest as if we are in a high inflation era, Erwin Rode, says, because asset classes perform differently in the various inflation eras.

In a disinflation period, equities do not perform as well relative to fixed-interest investments. But if South Africa enters an era of stationary low-inflation, equities will eventually become top dog again among the asset classes. Until we get there, however, we must not discard investments in property, he says.

South Africa had a long period of high inflation that started in the early 1970s and peaked in the 1980s. This was a result of lax monetary policy, characterised by low interest rates, Rode says.

However, since 1989 when Chris Stals took over [as governor of] the Reserve Bank and introduced high real interest rates, there has been a gradual decline in inflation. A decade later the government adopted a fiscal policy that supported lower inflation, and with a few interruptions, from the rand's decline against other major currencies, since 1990 we have been experiencing disinflation.

The average inflation rate between 1989 and 1998 was 10.8 percent, while over the five years to the end of 2002, the average inflation rate has been 6.5 percent.

Economists and the financial markets forecast that the average inflation rate over the next five years will be about five percent, Rode says.

The question that remains, he says, is whether inflation will fall as low as three or four percent and stay at that level. If this happens, South Africa will have entered an era of stationary low inflation.


Publisher: Personal Finance
Source: Personal Finance

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