Yesterday, 23 November, Fitch was the first ratings agency to review its credit rating for South Africa and kept it unchanged at one notch below investment grade for both the local and foreign currency. Tonight, Moody’s and S&P will also review their current ratings for SA. We are expecting S&P to make their announcement tonight at 18:30 and Moody’s closer to 23:30.
There is significant uncertainty about the outcome of tonight’s ratings updates and what the consequences are if we get downgraded for the currency, bond and equity markets. The worst-case scenario is a downgrade from both agencies, rating RSA to junk status. Since 90% of SA’s debt is in Rand, it will mean higher borrowing costs in the event of a downgrade, SA bonds could also fall out of major global bond indexes if one or both agencies downgrade RSA to junk, resulting in substantial capital outflows and a weaker Rand. We can expect an immediate Rand fallout should a double downgrade materialise, as well as a sell-off in local government bonds on Monday into a large discount, which may be an opportunity for long term investors to pick up assets at a relatively lower price.
To hedge against potential Rand depreciation it would be best to move your attention back to the interactive table to see which of the Top40 index constituents could prove to be the most effective Rand hedges. From this table, shares such as ITU, REI and CFR can be identified as good Rand hedges generating a significant proportion of their earnings offshore. Sell shares such as MRP, SHP and LHC with a lower proportion earnings offshore.
As mentioned in ’From The Dealing Desk 23-11-17’, one should also take into consideration the possible outcomes of the elections this December when making long term investments decisions. Should you anticipate a victory for Cyril Ramaphosa, you may think about adding SA income plays such as NED and FSR to your investments after the downgrade has been announced. This way you will buy into the dip and gain when the elections outcome is announced. If you think Nkosazana Dlamini-Zuma will win the elections, then the Rand hedges are likely not going to disappoint you.
Joani van Wyk
Joani van Wyk joined the asset management team in January 2017, responsible for quantitative research of equities across all industries. Joani completed her degree in Mathematical Science in 2015, as well as an Honours degree in Financial Risk Management in 2016, both at the University of Stellenbosch. She is currently a CFA candidate.