Amid the national lockdown to curb the spread of Covid-19, the downgrade of South Africa's credit rating to 'junk' status by Moody's last week is adding further anxiety and pressure to South Africans.
Although the rating agency's decision will negatively impact the Government's cost of borrowing and reduce the state's ability to provide other services, long-term investors invested in a well-diversified, growth-orientated portfolio, like those saving for retirement, should not panic.
This is according to Andrew Davison, Head of Advice at Old Mutual Corporate Consultants, who says that predicting the impact of Moody's decision is not so straight forward. "The downgrade has been widely expected since the Budget in February indicated a worsening fiscal position so it has been largely priced into the values of stocks, bonds and the rand. This means that, for instance, the interest rates being demanded by bond investors already reflect the lower creditworthiness. This can be seen by comparing the interest rates on our bonds to other countries that are already sub-investment grade," he says.
There might still be a further impact, though, especially when South Africa's bonds are actually removed from the Citigroup World Government Bond Index (WGBI), which is expected to happen only in May. "Although investors with investment-grade-only mandates will be sellers of South African bonds, other investors with less restrictive mandates will be potential buyers. In the sub-investment grade universe, South African bonds are likely to be very attractive on a risk-adjusted basis. So, demand might be quite strong," Davison says.
And, as a result of the economic devastation being sown by the Covid-19 pandemic, South Africa is but one among many other countries that have been, or may soon be, downgraded. Davison says that, on a relative basis, the country's bonds might not be so unattractive. The spread of Covid-19 and the global economic implications of the pandemic are likely to overshadow the downgrade and may even prolong and deepen South Africa's descent into sub-investment grade status," he says.
Battered investors have experienced a sharp sell-off in stock markets as fears have mounted about the impact of Covid-19 and the unprecedented lockdowns taking place across numerous countries. From these low levels, local stocks are pricing in a lot of bad news so further falls might be muted. One source of support for stocks may be the substantial offshore earnings of many JSE listed companies. Rand weakness may buoy these offshore earnings cushioning the effect of lower local profits.
Investors will need to be disciplined and stay the course as the current uncertainty looks set to be a feature of markets, not just in South Africa but globally, for some time to come.