Crunch could be a gold mine

THIS year is shaping up to be a challenge for those savers who wisely slipped the time-honoured attractions of the stock and property markets and instead sought shelter in the money markets.

THIS year is shaping up to be a challenge for those savers who wisely slipped the time-honoured attractions of the stock and property markets and instead sought shelter in the money markets.

Though their capital will be secure, their returns will tumble. As the global economy slides into deep recession, declining commodity prices and softening demand for goods and services will moderate inflationary pressures, obliging the Reserve Bank to drop interest rates.

On Thursday, the governor of the bank, Tito Mboweni, lowered the rates by 1percent but joked that after returning from the gloom and doom of the World Economic Forum, in Davos, Switzerland, he had been inclined to recommend a 2percent cut.

Thursday's was the second in the series of reductions that economists are forecasting for this year. The forward markets are pricing in a further 4percent decline by year-end. Ultimately, the real level will depend on how far the South African economy shrinks, as well as on how the rand holds up. The country relies heavily on foreign investment flows to fund its swelling current account deficit, and skimpy yields could diminish the currency's attractiveness.

At present, a three-month deposit with a leading South African bank pays 9.75percent a year, down from 11.5percent in November. By year-end, the rate could be well below 7percent. Those depending on interest income could find their annual revenue slashed by almost 40percent.

Spare a thought for American consumers who, after years of recklessly squandering their wealth, are finally staying away from the malls in an attempt to manage their debt and save. The US Federal Reserve, as part of a sequence of government-supported measures, has cut rates to virtually zero. Save your money in US treasury bills for three months and you will be lucky to earn 0.5percent a year.

The US is not unique. Central bankers globally are slashing rates as part of a co-ordinated programme for dealing with the worsening economic crisis.

Last week, the Bank of England cut its rates from 1.5percent to 1.0percent (which, according to business news agency Bloomberg, is the lowest since the bank was established in 1694 to help fund England's war against France).

Wherever you turn, rates are mingy. Europe is paying 2percent on short-term money, but with growth in the eurozone declining rapidly, returns are expected to fall in line with further reductions in the European Central Bank's rate.

For investors with an appetite for risk, bank and corporate debt instruments are offering staggeringly high returns.

The scramble by some money managers to raise liquidity to cover investor withdrawals, counterbalanced by their abject fear of default by other investors, has created a wide differential between the yields offered by secure government securities and riskier corporate and bank bonds.

As a stakeholder in Old Mutual, I recently received a report published by JPMorgan in which the insurer's debt and preference shares, with yields in excess of 20percent, were recommended more highly than its ordinary shares. The current pricing of Old Mutual's various securities suggests that the investing public believes that there is a better-than-even chance of the group defaulting in the next five years. Though the investment bank's positive recommendation refutes that contention, it affirms that the downside is lower for debt and preference share investors.

Old Mutual is not alone. There is an extensive list of similar opportunities on international markets. Naturally, in these turbulent times, nothing is certain. Some companies will fail, but by spreading one's risk, the rewards could be truly astounding.

No one would be bold enough to predict the bottom of the equity market in the face of the current news flow. Last week's headlines could not have been nastier, but investors ignored logic and pushed equity prices significantly higher.

Stock markets, traditionally, are regarded as sources of advance information - and last week's gains might be intimating that the worst is over. It might be wishful thinking, but we could be witnessing the beginning of the end of the financial crisis.