The strike-beset country’s credit rating was downgraded to just one notch above “junk” status by Standard & Poor’s on June 13, with Fitch Ratings changing South Africa’s outlook from stable to negative on the same day.
Donna Oosthuyse, MD of Citi South Africa, says a further downgrade will force a relook at its inclusion in the WGBI. However, she noted this week that credit quality was only one of several criteria impacting inclusion in the index and exclusion on that basis would not be immediate.
The JSE announced on Tuesday that Oosthuyse would join its executive as director of capital markets come August.
Launched in 1986 and currently comprising sovereign debt from more than 20 countries, the WGBI measures the performance of sovereign bonds and is widely used as the benchmark for more than $2 trillion (R21.46 trillion) of assets under management.
South African government bonds became the first African government bonds to be included in the index in October 2012.
Oosthuyse said that certain collective investment schemes would no longer be able to invest in the country following another downgrade, as their investment mandates prohibited them from investing in non-investment-grade securities.
Positively, she highlighted that Citi’s experience indicated that corporate loan demand for South African companies had picked up. “The global syndicated loan market is oversubscribed, indicating an appetite for South African paper,” Oosthuyse said.
Data from the SA Reserve Bank shows that inflows into South Africa’s equity market between February and May were the strongest they have been since 2009, reaching R24.1 billion.
According to Citi South Africa’s head of equities, Alec Schoeman, this surge was largely driven by investor jitters around geopolitical tensions in and between Russia and Ukraine and, to a lesser extent, Turkey. This caused investors to transfer funds from these regions to South Africa, which Schoeman said was “saved by being a safe haven”.
“With as much as 75% of the JSE’s earnings generated offshore, South Africa is perceived as the Switzerland of emerging markets,” Schoeman said. “For emerging market investors who are concerned about underlying economic trends, a large current account deficit and a low growth environment, the JSE provides emerging market exposure through companies that also have significant international earnings protection,” he explained.
Chief among these companies are SABMiller, British American Tobacco and Naspers, which have been largely responsible for driving higher an exchange that has risen as much as 11.05% year-to-date.
Schoeman pointed out that liquidity flows were asset-based rather than country-based, reflected in the fact that on a 10-day basis to July 8, R2.3 billion had flown out of equities and R8.6 billion had flown into bonds.
Citi remains bullish on the platinum sector, where Schoeman said the ability of listed entities to harness longer-term supply dynamics that would change in favour of demand, bodes well for growth.
He said there had been a healthy injection of new capital onto the bourse over the past few months, through rights offers and new listings for instance, and that this was a signal for further upside.