What will happen to my investments if SA debt is downgraded?

Many commentators are of the view that it is not a certainty that our sovereign debt will get downgraded to non-investment grade (“junk”) status. Moody’s, the most upbeat ratings agency as far as SA is concerned, decided last week not to downgrade SA’s sovereign debt rating at this stage, even though they retained their negative outlook on SA. Fitch and S&P are due to review our rating early next month, so we are not out of the woods yet, as S&P is more likely to give a non-investment grade rating than Fitch.

So what will happen to our investments if SA debt is downgraded next month?

Most analysts are of the view that Government Bonds, which comprise less than 30% of the Silke SA Stable Portfolio, and less than 10% of the Silke SA Balanced Portfolio, are already reflecting SA’s debt at junk status prices. If this is the case, then it is possible that not much will change in the domestic bond market if we are downgraded. When Brazil was downgraded, most of the bad news was already priced into their market before their downgrade, and bond rates only increased by a further 100 basis points after the downgrade. So a ratings downgrade is seldom a surprise, and should it happen, it will confirm what the economists already know.

According to Kokkie Kooyman of Denker Capital who wrote on this topic in February before the Budget. It seems that there are many who believe that South Africa will follow the Brazilian route, believing that the Rand and JSE will fall meaningfully following a downgrade. He is of the view that this is flawed, as markets react to unexpected events, and as mentioned above, a ratings downgrade would not be an unexpected event. The ratings agencies will not cause the JSE and the Rand to fall, other factors will be the cause, such as further unexpected weakness in the economy, unemployment statistics etc. It is also evident from his and other research that the JSE doesn’t necessarily reflect what is happening inside the country. The chart below illustrates this point over the last ten years:

JSE All Share Index vs Emerging Markets General Equity

At Silke Financial Services our sole objective is to generate and preserve long term generational wealth through attractive risk-adjusted returns over the investment cycle. Using our experience and investment model we can help you design and implement a wealth strategy that is customized to your specifications and for your exclusive access.

To re-iterate our October communique in which we quoted Ian Jones. Market volatility, which South Africans have been hit with over the last year, often causes investors to panic and make irrational decisions. However, our investment process is designed such that a specific combination of asset classes and fund managers have been chosen to fulfil a certain role in a client's portfolio. When markets are volatile, the portfolio has been built with a time horizon in mind to ensure that significant market movements don't overly impact the ability of the client to achieve their desired investment outcome. Short term market fluctuations don't result in a need to alter the portfolios or give in to any of the investor behaviour that leads to poor outcomes. It provides investors with confidence to remain invested in an appropriate mix of assets through any cycles of euphoria or panic.

We remain steadfast in our belief that with a disciplined, goal orientated financial planning strategy focusing on your personal, family and work related goals; financial "wealth" can be attained.

Regards,

Chris Norris
Wealthcare Advisor
BCom (Hons) Taxation (UCT) CA(SA)