LISTEN: How will the downgrades affect your pocket?

NASTASSIA ARENDSE:  Wayne McCurrie has sort of painted the scene, telling us what the downgrade means and why this particular one that took place with Fitch today was of significance.

Now we want to look at how the downgrade affects your pocket. We are aware that the political and economic realities of South Africa’s fortunes are beginning to unravel. We are all aware of what’s going on. But what does the downgrade mean for you and me? All I know is that the days of excess and living beyond one’s means are clearly over for me.

But to understand what all of this means I’m joined by Simon Brown, founder of JustOneLap, as well as Steven Nathan, CEO of 10X, who is joining us on the line.

Gentlemen, thank you so much for your time.

SIMON BROWN:  Thanks, Nastassia.

NASTASSIA ARENDSE:  Everybody is probably sitting back with all of this happening, flying across, and wanting to just cut through the noise and understand what this means for me and my pocket going forward – especially if I was, say, going to get a new car or buy a new house. What does all of this mean? I’ll start off with you, Simon.

SIMON BROWN:  The bad news is it’s going to get tough. The good news is that this isn’t falling off a cliff. If government takes on new debt and rolls over debt, they are going to do it at a higher rate. But we’ve only got 20% of our debt expiring between now and 2020.

So slowly the cost of that debt increases. That means the government is going to need to cut spending or more likely push up some taxes in that space. We could see some slightly higher inflation. Even if Wayne sees a rand at R14.50, that can be a bit inflationary. So it’s going to get tougher for consumers. Debt might cost you more, food might cost you more, transport and petrol might cost you more. It’s not happening next week. It’s really going to start playing out in 2018.

So to your question – if you were thinking of buying a car, downgrade the car. If you were thinking of buying a house, downgrade the house. Or perhaps run your car for an extra year or two and take that money you would be spending on a deposit and monthly instalments and put it in the bank and start building an emergency fund to protect yourself as we move into a tougher environment.

NASTASSIA ARENDSE:  Steve, bringing you into this conversation, we’ve just got a text that came in from Sandra Jenkins in Durban. It says, “My knowledge is limited and I would to know in simple terms what this junk status is all about?” Steven, can you help there?

STEVEN NATHAN:  A better word for it is sub-investment grade. There are rating agencies that effectively look at a country’s ability to repay its debt, and this relates to South Africa’s foreign debt. That gives a signal or an indication to potential investors of the potential riskiness, the ability of the borrower, being government, to repay people who lend it money.

South Africa has gone below what is called “investment grade”, so we are sub-investment grade. Really what it’s saying is that in the opinion of these rating agencies there is more risk attached with lending foreign currency to the South African government. Therefore the risk is higher and investors want to be compensated with a higher rate. So it’s becoming more expensive for the government to borrow money and it means more of the government’s expenditure is going to be allocated to paying interest on debt, which means that government has less money available for essential services like housing, medical , education, etc.

And then the knock-on impact, as others have been saying, is that we are going to have higher costs of money and we are going to have higher inflation. So as a country we are all a little poorer off because of this.

NASTASSIA ARENDSE:  Simon, I’m hearing these terms and I can imagine the audience as well wants to figure out – everybody is saying that if another rating agency downgrades us we get kicked out of this World Government Bond Index. How significant is that particular index?

SIMON BROWN:  There are lots, probably dozens of indices. I was digging this afternoon and I kept on finding more and more indices. As you move into this sub-investment grade, the junk status, some indices don’t want to include you. As you get more and more into junk status, fewer and fewer will include you. Asset managers around the world have mandates as to what and how they can buy, and they’ll be told you can’t buy debt if it is sub-investment grade. So certainly what it does is it shrinks that pool of potential investors to a degree.

Of course, as Wayne was saying a moment ago, that pool is quite large at the moment. We’ve got the largest number of junk status countries since we started measuring. But there are still investors out there who will take this risk. When Greece was holding talks around defaulting on their debt, the bonds were still trading – trading at very, very expensive levels.

So what it does is, you will always be able to raise money – that’s not the problem. The problem is the price that you pay. So there will a collective dropping out of bond indices as we get more and more sub-investment grades over the next six, eight, 12 months. As S&P comes back with our local [rating], as Moody’s comes back – and they said they’ll give us 30 or 90 days; they are going to review sometime before mid-year. S&P is back again at mid-year. So we will drop out and, as we drop out, the pool of potential investors shrinks.

NASTASSIA ARENDSE:  Steven, there is one question in now from Paul Chilone from Polokwane, saying “At what point do I start feeling the trickle [down] effects if I’m in the SME sector?”

STEVEN NATHAN:  Probably quite quickly. You just mentioned you are far less confident and a lot of the economy is based on upon confidence. So we all feel poorer. We may not know exactly what is happening, but we know something bad is happening. It’s likely that consumers are going to be less free in their spending, so they are going to rein in their consumption. And if you are an SME, you are probably likely to be impacted by that. I think companies will probably feel that quite quickly with a slowdown in sales, really because of this negative sentiment. If you are an SME and you need financing, you are probably going to see quite shortly that you are going to have difficulty in raising new finance at the same rate. You are probably going to pay more. But I think these things are incremental. You are not going to feel it overnight, but it’s a relatively incremental flow-through effect in the economy.

The good part of it is that we are going to become hopefully much more aware of money issues, and we are going to do much better with our money. So I think that people must use this as an opportunity to say, well, maybe I haven’t paid close enough attention to my finances or my investments. Let’s see things that I can control that are within my control, and let’s see how I can get a better deal myself. I know that if I am trusting others in the government at the moment, that’s not a good strategy.

NASTASSIA ARENDSE:  We have just received a text, Simon, from Zack in Kimberley, saying: “Analysts think it will take the ZAR to pick itself out of an economic slump.” This just reminds me of a certain minister who said if the rand falls we’ll pick it up.”

SIMON BROWN:  Again if we go back to December 2015, when then finance minister Nene was fired, the rand went to over R18/dollar briefly, and it’s been strengthening since then. We’ve got to understand what drives the rand, If the rand is moving weaker, it’s because foreign investors and some local – but mostly foreign – investors invested in South Africa are exiting their investment, selling the rand and going back to dollars or euros or pounds or something.

The stronger rand means that they are coming back into the country and they are investing into the country.

It’s to the point that it’s not a binary point. If an investor can get a return that they think is worthy of the risk that they are going to take, they absolutely will be prepared to take it. And if we look at Brazil, South Korea, both are examples where, post their going to junk status, their currencies moves stronger and their stock markets moved higher on the ground. The Brazilian economy is 7% smaller than it was before it got junk status, but there is sometimes almost a disconnect in terms of what we see in the market and the currency.

I’m with Wayne. I’m not expecting a blowout in the currency. I think once all this dust has settled we might see that rand start to slowly strengthen again, but perhaps slower than it did. Last Monday it was at R12.30/dollar. It might be a while before we get back to that point.

NASTASSIA ARENDSE:  Steven, a little earlier on Wayne was telling us that as we go into next week we shouldn’t panic and we should stay calm. But from an investment side, if you are looking at your pension and whatever else you are invested in, what do you do now? Do you just remain calm or have a long-term view on things?

STEVEN NATHAN:  Well, hopefully you have the right long-term strategy for your pension fund, because the most important part for a long-term investor is to have an appropriate long-term strategy, because we can’t predict any of these market dislocations. We can’t profitably predict them and position our portfolio so we jump in and out – and we always get that trade right. Most of the time or very often we get it wrong and it costs a lot of money to buy and sell shares and reinvest all the time.

So you should always have a long-term portfolio because, if you had a Brexit event or a Trump even or a ratings downgrade, you can’t invest on those short-term speculations. So you shouldn’t really have to do anything. If you are sitting in a retirement fund you should be in a high-equity or a long-term aggressive fund, where you have up to three-quarters of your money invested in the stock market, well diversified both locally and internationally. And if you look at what a retirement saver can do, you can only have 25% maximum of direct offshore exposure. So you should be at that and most funds would be at that.

But in the South African market more than half the JSE is rand-hedge anyway, so your portfolio is really well diversified. In fact – Simon can correct me – I’m pretty sure the JSE is actually up since we had the rating downgrade, because the rand weakness actually has a positive impact on a big chunk of the South African market. So if you look at 10X’s long-term portfolio, and I’m sure those of many other companies, our investment value is higher today than it was before the ratings downgrades. So don’t panic. If you are sitting in the wrong portfolio, then get it right.

But what you can do is you can say, listen, it looks like returns are going to be lower, so what can I control? I can control there. Can I save half or 1% of my fees? Take a close look at that, because there might be other areas where you can get value.

NASTASSIA ARENDSE:  Simon, we have a text here from Nthati in KZN saying, “Are there things I can do to minimise the financial pinch? I’ve just bought a new house and a car. Will I need a second job?”

SIMON BROWN:  Tough question. In the immediate sense, you’ve bought a house and a car. For the car you are probably in a fixed interest rate and the house potentially on a flexible rate. My point would be obviously, when you bought the house and a car you sat down and you looked at a budget and you decided what you could afford.

My advice would be sit down again and just cut more things out. Find a little more money here, a little more money here, just to build a bit of a buffer. Expect over the next couple of years for interest rates to go – whereas two weeks ago we were thinking maybe a rate cut down the line –at best sideways, or probably edge higher. In other words, that debt is going to start costing you more. You can’t give the car back, you can’t give the house back. Just attack your finances, even if it’s just a couple of hundred rand every month that you can now stick aside in an emergency fund that protects you for when that starts to happen. You made a great point earlier, which says maybe one of the points around this is that South Africans are going to start looking at their money and looking at their budgeting and thinking about debt and taking on debt, and, as Steven mentioned, about fees and that sort of thing. That might be a small silver lining.

NASTASSIA ARENDSE:  Just a quick test from Tracy May in Cape Town, saying: “Change for the better? Should Zuma change his administration or will it get worse?” Quick comment from you if he decides to actually say I’ve made a bad decision.

SIMON BROWN:  It is reversible. We saw that with Des van Rooyen. When he brought Minister Gordhan back the market did recover. I think there is a large sense of losing confidence in the president. But if he undid it all, we would recover some of it. Even post-Nene, with Pravin Gordhan coming in, we didn’t go back to what we were before the firing of then minister Nene.

NASTASSIA ARENDSE:  Thank you gentlemen, for taking us through how the downgrades will affect your pocket.

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