Foreign investor confidence takes a knock

Foreign investors are abandoning banking, general retailers and financial shares on the JSE after the ANC national working committee rejected calls for President Jacob Zuma to resign.

Zuma replaced former finance minister Pravin Gordhan with Malusi Gigaba in a cabinet reshuffle last Thursday, leading to a downgrade of SA’s debt by S&P Global Ratings on Monday.

The banking index ended the day 2.38% weaker on the news, with Barclays Bank (3.99% down) and Nedbank (2.85% off) the hardest hit of the big banks. Capitec lost 4.1%.

Among financials, Sanlam lost 6.74%. Sanlam and Barclays Africa were both ex-dividend for the day, with a 4% effect on their share prices.

The banking index has lost 2.67% so far this week, after losing 10.02% last week.

Analysts said the banking, general retailer and property sectors were expected to remain under pressure on further downgrade concerns following S&P’s downgrade on Monday.

“A weaker rand causes investors to switch out of local shares like banks, retailers and local property stocks into rand hedges,” said PSG Wealth portfolio manager Adrian Cloete. For banking shares to recover, the rand needed to stabilise and bond yields had to start coming down again, he said.

Cloete did say though that SA’s banks were “more than adequately capitalised” to withstand the S&P downgrade.

The ratings announcements from Fitch and Moody’s are still

outstanding, with Moody’s saying its decision will be released in the next 30 to 90 days. S&P has SA on a negative outlook.

“The country will be much poorer for president Zuma’s action,” said Anchor Capital chief investment officer Sean Ashton.

SA was at a crossroads, he said. “There was either widespread pushback against Zuma’s decisions, or SA faces a bleak future.”

Sentiment on banks was further under pressure on Wednesday, after the Treasury confirmed that director-general Lungisa Fuzile was set to leave the department, sparking concern about an exodus of institutional knowledge.

Foreign investors, mainly pension funds, own 39% of the top 100 companies listed on the JSE to the value of about R2-trillion and 30% of South African bonds in issue to the value of R1-trillion.

“As soon as a country loses its investment-grade rating, many of these foreign investors may be forced to withdraw their money, which could result in a large-scale sell-off of equities and bonds”, said CEO of the Association of Savings and Investment SA, Leon Campher.

Banking shares came back on Tuesday after initially losing ground, following a ground swell of anti-Zuma sentiment.

Traders were forced to cover their short positions, Nedbank Corporate and Investment Banking analysts said, with the yield of the benchmark R186 bond falling below 9% also supporting banking shares.

The same pattern was evident on Wednesday, with banking shares coming back on falling bond yields on the 10-year R186. Banking shares did get priced for value on the 10-year bond, Cloete said.

“So, if bond yields tick up, then banking shares should trade down,” he said.