It’s just too soon to tell
With the threat of a credit rating downgrade still hanging over the country, would now be a prudent time to move assets abroad?
This is a question that will be weighing heavily on investors’ minds in the coming months, as the impact of such a move on the currency and locally held investments will undoubtedly be severe, writes Johann Barnard.
Opinion is divided on whether ratings agencies will make the cut and whether government will be able to deliver on its promised reforms to address the agencies’ concerns, which is one of the key conditions needed to avoid the downgrade to below investment grade status.
Speaking at a presentation to financial advisers in Sandton earlier this month, Investec Asset Management director Jeremy Gardiner said he felt fairly confident that the downgrade could well be staved off. “For the first time ever we have business, labour and government working together. It’s very exciting and if we continue to do that, we will get through again,” he said.
His confidence is based, first, on the apparent unity in addressing issues such as labour unrest and the fact that business and labour should be able to engineer a resolution to the perennial conflict. Second, he believes finance minister Pravin Gordhan will keep to the undertaking to ensure the independence and proper functioning of key institutions such as the Reserve Bank and National Treasury.
Third is the matter of economic growth. This has to be seen in the context of SA’s emerging market peers such as Turkey and Brazil. Gardiner says that even flat growth, as projected by the Reserve Bank, is better than the negative growth forecast by peers.
Sticking with Brazil as a benchmark for the travails of emerging markets, Galileo Capital’s Warren Ingram says the downgrading of that country’s credit rating last year to junk status has not resulted in complete doom and gloom.
“You would think that the currency, markets and the economy would suffer in the 12 months after the downgrade. But if you look at the example of Brazil, and if you have a free-moving currency, chances are greater that it and the market will strengthen following a downgrade,” he says.
“The currency and market will no doubt take a hiding immediately after the announcement, but once the panic is over and people start to analyse the fundamentals, SA [will be seen to look] pretty good compared to its peers. SA is undoubtedly the smartest operator in [what would be] a much smaller pond of emerging markets rated at junk status, and our peers are going through some pretty tough times. So we could attract more emerging market investors, and if history repeats itself — countries tend to take corrective action and introduce reforms — sentiment could become more investor positive.”
The clever money appears to be on adopting a wait-and-see approach, as it is impossible to predict what might happen over the next few months.
Ingram suggests that it may not be a bad idea to start phasing in offshore investments in the period before the credit rating decision and then waiting to see how markets and the currency react. “I would caution, however, that it’s dangerous to make an investment decision based on a ‘yes or no’ outcome,” he says.
Stephen Meintjes, head of equity research at Momentum SP Reid Securities, says that factors such as changes in political leadership and whether government delivers on the promised reforms could sway sentiment positively, though only time will tell what the outcome may be. “So I would keep some powder dry for the eventuality of a downgrade, though it does look as if the economy will be better off next year,” he says. “You have to look for stocks in particular niches or those growing successfully outside SA. I would say it is too early to invest in SA economy-geared stocks.
“As for outward-looking JSE stocks, one could simply focus on these, but the general principles of investment predicate that one should look further afield as well.”
He says it is a particularly difficult time to be trying to make decisions on investing offshore given all these uncertainties, especially about where the rand may end up. The view by some that it might strengthen to close to R12/dollar adds to his sense of caution as people could lose out by investing too early, should SA avoid the credit rating downgrade.
The sense of uncertainty is not helped by global markets generally not pointing to any clear winners or safe havens. The Brexit decision alone has thrown such decisions into turmoil as the world awaits the full impact of the UK leaving the EU.
Dave Christie, a product specialist at Ashburton Investments, says this has led the firm to adopt a more defensive approach while it searches out value and tries to discern where the markets may go.
“It is definitely precarious at the moment and an interesting place to be post-Brexit. We have been light on equities and are holding onto some dry powder for when the markets improve in terms of offering better value.
“Right now is possibly a time to sit on the sidelines given the uncertainty of how Brexit [will play] out and then to try and pick up some value in pockets that we can find,” he says.
The sense of uncertainty is not helped by global markets generally not pointing to any clear winners or safe havens