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Standard & Poor’s Global Ratings has again downgraded SA’s foreign and local currency ratings by one notch each to BB and BB+ respectively.
Moody’s puts SA’s ratings on review for possible downgrade.
The rating outlook on both counts has been revised to “stable” from “negative” as the country’s fiscal metrics are now forecast to remain relatively unchanged in 2018, after the sharp deterioration seen in the recent medium term budget speech presented by Finance Minister Malusi Gigaba. Political instability could abate following the ANC’s elective conference in December.
Making Sense of Things: The downgrade mainly reflects the impact of a further deterioration in the country’s economic growth outlook and the government’s fiscal flexibility. S&P lowered its real GDP growth projections to 0.7% in 2017 and 1% in 2018, from 1% and 1.3% respectively, noting this is expected to lead to an “unprecedented shortfall in tax receipts in 2017-18.”
While another rating’s downgrade has all along been factored into the FirstRand house view, the downgrade by S&P has brought forward the timing of anticipated capital outflows as the country is no longer eligible for inclusion in the Barclays Aggregate Bond Index. The resultant capital outflows should trigger a somewhat weaker exchange rate, a slight upward adjustment in our inflation trajectory, while also raising the prospect of earlier than initially anticipated interest rate hikes.
Policy Conference Implications: Significant event risk remains over the coming months, most notably, the ANC elective conference. While we hope for greater policy and political certainty after December, for now, we assume a continuation of the current trajectory, and so the possibility that Moody’s follows both S&P and Fitch, lowering SA’s credit rating to sub-investment grade.
So what does this mean for your investment?
Diversification will continue to be the dominant theme – which ensures that portfolio risk is reduced, whilst taking advantage of growth opportunities of a diverse investment portfolio. In this way clients will be well positioned to maximise their risk adjusted returns. Our base case of the most likely outcome is the middle road, which we believe, to a large degree is already priced into the asset class valuations and our weightings are not too far from their respective benchmarks: More specifically:
• Bond yields have already more than priced in junk status. We are close to a neutral positioning here.
• Equity positions (neutral weighting) are very well diversified. There is a natural rand hedge bias with 65% of the portfolio likely to benefit from a weakening rand. Of this 57% reflects positions where assets, costs and revenues are derived from offshore, 6% reflect positions where costs are rand based but revenues flow from offshore, and 2% where positions reflect an element of import substitution. Exposure to SA economic sensitives where revenues and costs are SA based make up 28% of the portfolio, while a further 8% of the portfolio reflect positions with an import cost component but where revenues are SA based.
• SA listed property reflects a slight underweight position given the very challenging SA economic outlook. There is however a significant rand hedge component with 41% of the portfolio exposed to offshore assets.
• Offshore exposures also reflect a neutral stance right now going into the conference.
• SA Cash exposures are slightly elevated to ensure that we have some powder dry to invest on any meaningful market moving outcomes.
Source: FNB Wealth and Investments