Economists suggests that we’re in danger of getting that downgrade this year.
There is clearly a lot to be done to avoid a downgrade this year and all ratings agencies are keeping a close eye as their “negative watch” hangs like a dark shadow over our local economy.
But what is the impact on our market? Our stocks?
A junk status rating will almost certainly trigger a flight of capital.
That is money going out.
READ: Penny stocks can leave you penniless
This is because sovereign downgrades directly impact on bonds and other fixed income securities, making them less attractive to foreign bond investors.
The result is that they shift their money to markets which offer better returns.
Why does this matter?
Well foreign investors hold over R60-billion in government securities … see the problem?
That’s big, even in Zuma numbers.
What about stocks?
Not all of our stocks will suffer to the same degree.
The reason I say this is because we have 39 “dual listed” stocks on our exchange.
This means that we have shares who have primary or secondary listings in countries outside South Africa.
These exchanges include London and New York.
These companies are likely to be less affected because most of their earnings are from abroad and in foreign currencies.
As for the rest, well … companies listed solely in South Africa would be affected by the country’s poor economic performance and the resulting weaker currency, should we get a downgrade.
As our bond market reacts to a downgrade, the ripple effect would most certainly extend to the rand, causing it to weaken against other major currencies.
Companies who are reliant on the South African consumer in an ailing economic environment will feel the pain.
If the consumer struggles, so do they.
They will be forced to look “elsewhere” for growth and revenues which means that their valuations could drop due to higher costs of capital.
This is serious
In a previous column I did say that I think a lot needs to be done but that I believe a downgrade can be avoided and that it is not all doom and gloom.
The consequence of a downgrade; however, is long lasting.
Statistically it takes a country an average of seven years to regain its investment grade status.
That is some rehabilitation period!
Think ahead
It may not be a bad idea to assess your investment portfolio early in the year and understand your exposure.
I have often spoken about spreading your risk and diversifying across assets and I think now is the perfect time to seek out the various options available to investors.
Given the imminent risks that this year holds in general, this is the time to have an investment contingency plan.
I’m always happy to offer advice to my readers so please feel free to contact me through benonicitytimes@caxton.co.za
In my view, 2017 is the year for prudence and profit protection.
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