SIMON BROWN: The days of cheap money are behind us

The March US Federal Reserve meeting has now passed without a rate cut. It was somewhat surprising: as recently as January markets were pricing in an almost 70% chance of rate cuts, the first of six for the year. In the press conference, Fed chair Jerome Powell was clear that the target for 2024 is three cuts — though he did seem to fudge the issue of being data dependent. But let’s ignore that important point for now.

The stark reality is that 2024 will be another year of higher rates around the world, while locally the consensus is that rate cuts of 1% are about the best we can hope for.

The bigger reality is that, barring another global financial or health crisis, rates are not going back to the ultra-low pre-pandemic levels we saw for more than a decade after the 2008/2009 global financial crisis, and we’re already seeing the repercussions of that.

The consumer was first to be hit and continues to be under pressure with the double whammy of high inflation and high rates. Even with inflation being lower, it’s still hurting as the interest rates drain wallets, leaving little for discretionary spending — and that discretionary spending is of course more expensive thanks to inflation.

But we’re now also seeing businesses being hurt as interest bills rise. Business debt may at times be a fixed rate, but over the shorter term. So while the rate-fixing shields businesses for a while, eventually those higher rates catch up with them. Results are showing just that. Those with floating rates have been getting hurt since late 2022, with the pain peaking midway through last year. Net interest payments are becoming my first port of call when checking results these days.

The flip side is a business with lots of cash, such as an Apple (more than $150bn) or, locally, the JSE, which holds more than R2bn of “cash and cash equivalents”. They’re both earning increased income off those cash piles.

Another example of how these higher rates could really create problems is in the real estate investment trust space. They’re under pressure as they typically have a fair bit of debt, with loan-to-values (LTVs) of about 40% fairly common, resulting in increased interest bills.

With higher rates one could argue that building values should decrease in order for the yields to remain attractive to investors when compared with the yields being offered on government bonds. So if valuations reduce, then those LTVs move higher and lenders may start to get stressed about debt levels again.

The point is that the days of cheap, and sometimes free, money is behind us. Business needs to adapt and so do we, as investors. A business with a lot of debt is going to find profits under pressure, and while it can restructure the debt to a degree and pay it down over time, in the shorter term conditions will remain tough. It means we should be cautious, favouring low-debt or cash-flush businesses.