Forget the Greeks, you could also be a casualty – Absa

Forget the worries about Greece and Europe – ordinary South Africans could also fall casualty to the impact of Europe’s sovereign debt crisis, according to an alert from the private clients advisory business at Absa Asset Management.

For one thing, says Absa Asset Management Private Clients analyst Chris Gilmour, South Africans face heightened currency risk; perhaps while on holiday in Europe for events like the London Olympics.

Even investment portfolios heavily weighted to domestic equities could be affected if Greek jitters lead to heightened risk aversion.

“In this event,” says Gilmour, “South African assets would probably be regarded by international fund managers as risky emerging market holdings, leading to softer prices on the JSE.”

The rand has already weakened against major currencies, but South Africans should not assume the danger is over.

“Further weakness over the next six months cannot be ruled out,” he notes. “Greek elections in mid-June might cause further nervousness. After that, wrangling between a new Greek government and the German government could trigger further concerns, with knock-on effects in the currency markets.”

South Africans, however, were no longer totally at the mercy of rand gyrations.

Gilmour explains: “The Reserve Bank’s hedging facility enables South Africans to book their foreign currency up to six months in advance; in effect, securing the rate well before departure.

“One strategy might be to use the hedging facility for half your overseas spending money and take a risk on the other half. If the currency firms, you feel the benefit with the half you held back. If it weakens, you at least controlled some of your exposure.”

Equity impacts were difficult to predict, but foreign buying underpinned valuations in some JSE sectors, making them potentially vulnerable to increased risk aversion in international centres.

Some shares, however, had relatively good defensive qualities.

“In uncertain times, rand hedge stocks generally hold up rather well,” says Gilmour. “For instance, gold shares incur costs in rands while their receipts are denominated in dollars.

“Another stock with good defensive qualities is Sasol while an international luxury goods retailer like Richemont also warrants close attention.”

Not all possible impacts are worrying. The situation is so fluid that some scenarios may ultimately benefit South African assets.

“At least one scenario is beneficial,” he adds. “In the event of a Greek default, the major economies may seek to limit the damage by a new bout of quantitative easing.

“Central banks would then introduce new money into the money supply. But major companies in some of the developed economies already sit on lots of cash so there might be limited appetite for this money, which could then find a home in an emerging market such as South Africa – perhaps boosting our share and bond markets while helping the rand to firm.

“But for the present, further caution is advised.”