This article is a press release from Rezco, an asset management and investment consulting company.

Reports that the US is set to reduce its quantitative easing programme at the end of this year have already sent emerging markets into a tailspin, but investors can expect further weakness in the Rand and a rise in interest rates as the programme winds down.

This is according to Rob Spanjaard, Investment Director at Rezco Asset Management, who says that while the announcement has already had a significant impact on global markets, when the quantitative easing programme is brought to a halt, the impact will be even more severe.

“Quantitative easing is simply a polite term used by the US Federal Reserve for printing money out of thin air. All governments run an official mint where currency is printed and coins are produced but normally a government only prints new currency to the extent that the economy has grown,” says Spanjaard.

“The impact of the end of quantitative easing will cause interest rates to increase worldwide. Furthermore, we are likely to see a withdrawal of money from emerging markets. Currently, investment firms have been seeking higher interest rates in emerging markets such as South Africa. This trend will change with the money returning home to developed markets, thereby increasing the pressure on both the Rand and equities listed on the JSE.”

Spanjaard says South Africa’s trade and financial outflows are currently greater than its inflows by about R200 billion per year. “We have been heavily dependent on foreigners buying local shares and bonds in order to make up this imbalance. As these flows begin to slowdown, the Rand will consequently come under pressure, which will have a consequent impact on inflation and interest rates.

“The quantitative easing programme in the US originally started in 2008 as a means to rescue the banking system from the collapse in financial markets. The US Federal Reserve has been printing about $85 billion a month, which equates to as much as $3 trillion over the last five years.

“A quantitative easing programme on this scale is not sustainable forever and we would expect it to be stopped by the end of the year. When the programme does end, it will have to be replaced with a normal world where governments that want to spend more than they collect in tax will be required to borrow the difference.”

“While we welcome the fact that the US is bringing its quantitative easing programme to a close, as it can certainly not be an indefinite solution, investors must also remain cognisant of what this will mean for the local market and for interest rates and plan accordingly,” concludes Spanjaard.