Equities and bonds brace for a further downgrade

SOUTH Africa’s equities and bonds are bracing for a possible further credit-rating downgrade after the lukewarm Medium-term Budget Policy Statement (MTBPS) and a tumultuous run-up to the ANC’s national policy conference next month.

Patrice Rassou, the head of equities at Sanlam Investments, said returns from South Africa’s equities for the rest of the year would hinge on political developments.

“While the JSE has hit record levels, we still see pockets of value. But equity markets are likely to brace for a further potential credit downgrade and the outcome of the ANC conference.

“The market reaction is likely to be binary and hinges on political developments,” Rassou pointed out.

South Africa’s stock market has been bullish in the past month, reaching new highs, supported by a weak rand.

Macroeconomics statistics website Trading Economics said historically, the South African stock market reached an all-time high of 59638.21 this month and a record low of 26738.91 in August 2010.

Ratings agency Moody’s is on record as having already termed the MTBPS as “credit negative”, warning that fiscal prudence would give way to rhetoric in the run-up to the 2019 elections.

Delegation

Last week, S&P Global met the country’s key economic players, but snubbed the governing ANC. A Moody’s delegation is expected in the country this week.

S&P and Moody’s are both expected to review South Africa’s credit rating again later this month.

A downgrade by S&P or Moody’s would push the country’s bonds out of widely used global bond indexes that rely on investment grades only.

Nolan Wapenaar, an analyst at Anchor Capital, said he expected South Africa’s inflation to begin to trend higher again towards the second half of next year and this would begin to weigh on the attractiveness of local bonds.

“As a result, we have marginally increased our target yield towards 8.65 percent. This is also pricing in one further ratings downgrade from S&P, while we expect South Africa to retain its rating at Moody’s.

“Yields over the last quarter rallied towards 8.35 percent, which was slightly stronger than our target yield of 8.45 percent. The global macroenvironment has remained more forgiving than we had expected,” Wapenaar said.