Standard & Poor’s Global Ratings last month cut South Africa’s foreign currency debt to sub-investment grade, while Fitch Ratings cut the country’s foreign currency and local currency ratings to sub-investment grade.
Tucker said panic selling was one of the risks of the downgrades. He said the South African equity market has held up well despite the downgrades.
“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,” he said.
He said in the past 10 years there had been a shift in the composition of the South African equity market, and an increasing number of shares have global exposure. He said some of the major companies have extensive investments outside South Africa.
He cited multinational internet and media group Naspers as an example. “A big driver of what happens at Naspers is what happens in China and (its affiliate), Tencent. The same can be said for Richemont and Anheuser-Busch InBev. There is an assumption that, if an economy goes in a particular direction, the market will do the same.
That is not often the case. But there are stocks such as Imperial and Foschini which will respond to factors in the local economy. These factors must be looked at on a stock-by-stock basis,” he said.
He said that recently there have been higher flows into the South African bond market as investors shifted their focus towards emerging-market funds and bond funds. He said that, with a yield of between 8.5 and 9percent, the South African bond market was relatively attractive in global terms. “That has contributed to the inflows,” he said.
Tucker said South Africa remained reasonably safe within global bond benchmarks, which were constructed on the basis of the credit quality of the local component of the debt issued.
“However, if both Moody’s and S&P's 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,” he said.
He said a downgrade in the rand rating by the two agencies could result in an outflow of money, mainly from passive funds.
“To put this into context, the proportion of the local bond market that is owned by foreigners is roughly 31 percent. 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 on the rand and the country’s ability to issue credit at a reasonable price in future,” he said.
BUSINESS REPORT ONLINE