Equities shrug off downgrades

JSE rises to near-record high

2.9% The amount that resources shares shed on the JSE

SOUTH African equities yesterday continued to shrug off last week’s downgrades by two rating agencies to sub-investment grade with the JSE All-Share Index closing at a near-record high of 53 551, representing a one-year increase of 2.8 percent.

In May last year, the index closed at 54 704.

Econometrix chief economist Azar Jammine said the downgrades appeared to have lifted the JSE. “The expectations would remain that the rand would stay weak, and because JSE-listed companies have substantial investments offshore, they might just as well repatriate them at a cheaper rate which is what would aid the South African equities,” Jammine said.

Offshore exposure He added the JSE had been flat for the past 10 years in dollar terms, which illustrated how a weaker rand had benefited the market.

Well-diversified investment portfolios also held up – gaining more than 2.5 percent with the weaker rand giving unit trusts offshore exposure.

However, SA Institute of Race relations economist Ian Cruickshanks said it was foolhardy to gauge the blow-byblow of the markets reaction as the real impact of the downgrades would be felt in the coming months and years.

“We are lucky to see no GDP growth this year. In the next year or two, we are going to have a depreciating rand because we are going to struggle to get capital,” Cruickshanks said.

There was, however, mixed fortunes by sector share performance on the JSE yesterday.

Resources shed 2.9 percent and gold mining 0.82 percent.

Financials added 1.4 percent. The banking index, which bled 11 percent last week, yesterday closed higher at 3.09 percent. Bank stocks took a hammering two weeks ago after President Jacob Zuma axed Pravin Gordhan as finance minister and replaced him with Malusi Gigaba

The stock extended losses when Standard and Poor’s and Fitch downgraded South Africa’s credit rating to junk status.

Head of Multi-Asset at Prudential Michael Moyle said the downgrades did not alter their investment outlook and it continued to place great importance in building well-diversified portfolios of attractively valued assets with the appropriate risk.

“The weakness seen in South African nominal bonds, listed property, and financial and retail shares has presented good opportunities for investors to buy up attractive assets at discounted valuations that should produce above-average returns over the medium term,” Moyle said.

Another emerging market country that has shrugged off the dreaded junk status is Brazil.

Brazil, which is also a Brics (Brazil, Russia, India, China and South Africa) member, was downgraded by Standard and Poor’s in September 2015.

The country’s bond yields had declined substantially and the currency appreciated.

Moyle said that investors were overweight in many of our portfolios since this gave us the ability to take advantage of opportunities as they arise.

“Among South African assets, we are moderately overweight equities, nominal bonds and listed property at the expense of inflation-linked bonds and local cash,” said Moyle.