Triple junk ‘may hurt savings’
• More credit rating downgrades could squeeze bonds and shares and devalue investments, says industry body
A downgrade of SA’s credit rating to junk status by all three major ratings agencies could put downward pressure on bonds and JSE-listed shares, which would lead to a drop in the value of South Africans’ investments, says an industry body.
Foreign investors including pension funds, had about R2-trillion invested in the JSE and R1-trillion in government debt, said Leon Campher, CEO of the Association for Savings and Investment SA.
He said there was R9-trillion in domestic regulated savings pools. About R1.4-trillion of this was invested in government bonds and R5-trillion in shares, primarily listed equity.
Were Fitch or Moody’s to follow S&P Global Ratings in downgrading the country’s foreign-currency credit rating to subinvestment grade, some international investors including pension funds, would become forced sellers of the country’s bonds and equities if their mandates obliged them to hold assets in countries with investment-grade credit ratings.
This could result in money flowing out of SA’s bond and equity markets, leading to weaker asset prices and a decline in the value of investors’ savings, Campher said.
“Moments like this highlight the benefits of being well diversified,” said Mokgatla Madisha, head of fixed interest at Sanlam Investment Management.
Although bonds, banking shares and property stocks had weakened on the cabinet reshuffle and downgrade, the top 40 index was stronger, Madisha said.
The banks index had lost more than 10% since the beginning of last week, while listed property was down about 3.5%.
The overall market had moved very little on news of the downgrade, indicating it had been priced in, said Madisha.
“For the bond market, what is most crucial is that the government sticks to the expenditure ceiling as outlined in the February budget and looks to reduce debt,” he said.
Some global pension funds would have allocations to subinvestment grade-rated assets, he said. SA’s inclusion in the World Government Bond index, valued at about R130bn, was based on the country’s local currency rating, which remained investment grade, Madisha said.
Credit ratings downgrades increased the cost of debt throughout the economy.
“Interest rates on government bonds will rise to compensate investors for increased risk and the Reserve Bank will keep interest rates elevated to compensate for a weaker currency,” said Madisha.
It was important the country now tackled issues that had led to the downgrade, he said.
In its review, S&P said heightened political risk and likely policy shifts could undermine fiscal and economic growth outcomes “more than we currently project”.
Alexander Forbes urged retirement-fund investors not to panic. “If you’re young and have a long time to retirement, stick to your strategy,” said Mark Lindhiem, chief investment officer at Investment Solutions, part of the Alexander Forbes Group.
“If you are nearing retirement, understand where you are invested and what the risks are,” he said.
THIS COULD RESULT IN MONEY FLOWING OUT OF BOND AND EQUITY MARKETS, LEADING TO WEAKER ASSET PRICES
10% is how much the banks index has shed since the beginning of last week
3.5% is the drop in listed property. The overall market has moved very little
Rafiq Taylor, portfolio manager at Sanlam Multi Manager, said that staying the course with retirement investments and not being “reactive” to news flow was paramount to preserving and creating wealth.