Managers see 2018 downgrade

About 80% of local fund managers expect SA to lose its investment grade rating on local bonds from S&P Global Ratings and Moody’s before end 2018, according to the monthly Bank of America Merrill Lynch Fund Manager Survey.

Last month, 38% of managers anticipated this outcome.

Strategist John Morris says this suggests managers don’t believe today’s Medium-Term Budget Policy Statement (MTBPS) will change rating agencies’ views. S&P and Moody’s will probably wait for the outcome of December’s ANC elective conference to see what it means for SA. Fitch already downgraded the local rating to junk.

Agencies are expected to announce their ratings decisions on November 24.

“As a house, our base case is that we lose S&P investment grade in the first half of 2018,” Morris says.

He says local fund managers are asking how to position for the ANC elective conference. They largely view the outcome as binary: a “reform” result would be positive for the rand, while a “non-reform” result would mean SA continues on its current trajectory.

These outcomes would have different implications for the rand, bonds and interest rates, and pose a dilemma for local managers.

“They are more overweight offshore and the asset allocation is defensive, so they prefer cash first, followed by bonds and then equities.”

About 60% of managers see policy shifts to the left as the biggest domestic risk to SA equity performance,.

Flows from some foreigners leading up to the ANC conference suggest they’re prepared to give SA the benefit of the doubt, says Neil Cohen of South Africa Global Markets.

Foreigners perceive the risk-reward metrics of some domestically-focused SA stocks such as banks and retailers as positive. A favourable outcome at the conference will likely result in a strong rally in these stocks.