Life after junk status: where to now for South African investors?

Graham Tucker, Fund Manager of Old Mutual Balanced Fund.

With Fitch ratings agency having downgraded South Africa’s sovereign credit rating to sub-investment grade and Standard & Poor's (S&P) cutting the country’s foreign currency rating to junk but keeping the local currency rating a notch above for now, a lot is riding on the impending credit rating by Moody’s, which currently holds South Africa on review for a downgrade.

Yet in spite of the uncertain position South Africa finds itself in, investors should be mindful to distinguish between the economy and the market when making investment decisions.

This is according to Graham Tucker, Fund Manager of Old Mutual Balanced Fund - a fund offered by Old Mutual Investment Group - who says that the major risk from an investment point of view remains that of panicked selling. He adds that, despite the local volatility of late, South Africa’s equity market has held up reasonably well since the downgrade announcements. “Many of the big listed companies have a large global footprint, which means their performance is more affected by the rand and what’s going on globally, as opposed to what’s happening on a local level.”

Tucker goes on to clarify South Africa’s current position in term of global bond indices. “At this stage, South Africa remains reasonably safe within global bond benchmarks, which are constructed on the basis of the credit quality of the local component of debt issued. However, if both Moody’s and S&P also downgrade the local currency rating to sub-investment grade, as Fitch has already done, South Africa would be excluded from the largest global bond index, the Citigroup World Bond Index, which would likely result in a significant outflow of foreign investor money.

“To put this into context, the proportion of the local bond market that is currently owned by foreigners is roughly 31%. In the event of South Africa being excluded from this global bond index, these foreign investors could be forced to sell, which would have a material impact of the rand and the country’s ability to issue credit at a reasonable price in future,” he explains.

From an investment point of view, Tucker says that this heightened level of uncertainty gives portfolio managers an opportunity to take advantage of possible mispricing in the market.

“The reality is that in most cases the man on the street is not going to be able to move nearly as quickly and efficiently as a portfolio manager can. For this reason, being invested in an actively managed and well diversified multi-asset class portfolio makes more sense. A portfolio manager is also able to access a number of different tools in order to reach their investment objectives.”

Tucker concludes that despite South Africa’s uncertain economic state, people shouldn’t be panicking. “We are undoubtedly in a volatile environment and while this volatility is likely to stay with us for some time, it is important to remember that the market does not always mimic the economy and, due to a growing global footprint trend, many investments actually favour a weaker rand.

“Investors should continue to engage with their financial advisors to ensure that they are in an actively managed diversified portfolio in order to ride out, and possibly even capitalise on, the current uncertainty, as well as any volatility that lies ahead.”