• Andrew Davison

Downgrades: What they mean for long-term investors

While the world reels from the human and financial cost of Covid-19, South Africa’s most recent credit rating downgrades by both Moody's and Fitch put South Africa’s already pressurised investors under even more pressure. What, if anything, should you do?

Don’t take your eye off your long-term savings

Although the rating agencies’ decisions will have a negative impact on the cost of government loans and reduce the state’s ability to provide other services, long-term investors with a well-diversified, growth-orientated portfolio, which includes retirement funds, should not panic, says Andrew Davison, Head of Advice at Old Mutual Corporate Consultants.

‘The downgrade was widely expected since the Budget Speech in February indicated a worsening fiscal position and has already been largely priced into the values of stocks, bonds and the rand,’ he says.

‘This means that, for instance, the interest rates demanded by bond investors already reflect the lower credit-worthiness. This can be seen when comparing the interest rates on our bonds to those of other countries that are already sub-investment grade.’

‘The spread of Covid-19 and its implications for the global economy are likely to overshadow South Africa’s downgrade.’

The impact on South African bonds

Thanks to Covid-19, we have had a one month reprieve on the removal of South Africa's bonds from the FTSE Russell World Government Bond Index (WGBI), which is expected to happen in May. At this point, there may be a further shift on bonds and possibly the rand.

‘Although investors with investment-grade-only mandates will be sellers of South African bonds, other investors with less restrictive mandates will be potential buyers. In the sub-investment-grade universe, South African bonds are likely to be very attractive on a risk-adjusted basis. So demand from there investors might be quite strong,’ Davison says.

In the shadow of Covid-19

As a result of the economic devastation sowed by the Covid-19 pandemic, South Africa is but one of many countries that have been, or may soon be, downgraded.

According to Davison, South Africa’s bonds might still be more attractive than those of other countries that are in the same boat. The spread of Covid-19 and its implications for the global economy are likely to overshadow South Africa’s downgrade and he believes they may even prolong and deepen our descent into sub-investment grade status.

‘Battered investors have experienced a sharp sell-off in stock markets as fears have mounted about the impact of Covid-19 and the unprecedented lockdowns in numerous countries.

‘From these low levels, local stocks are pricing in a lot of bad news, so further falls might be muted. One source of support for our stocks may be the substantial offshore earnings of many JSE-listed companies. The weak rand may buoy such offshore earnings, cushioning the effect of lower local profits,’ Davison says.

Nonetheless, investors will have to be disciplined and stay the course as the current uncertainty looks set to become a feature of markets across the globe for some time.

For more insights on the downgrade by Old Mutual Corporate Consultants, what it means for South Africa’s stock market and lessons we can learn from Brazil, click here


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