Nastassia Arendse
5 minute read
8 Apr 2017
11:04 am

More countries than ever are now in ‘junk’ status

Nastassia Arendse

Wayne McCurrie explains types of downgrades, foreign debt and domestic debt, and considers bond pricing, rand prospects, banking shares, and panic effects.

NASTASSIA ARENDSE:  Good evening and welcome to the SAfm Market Update with Moneyweb. My name is Nastassia Arendse standing in for Siki Mgabadeli.

I’m joined in the studio by Wayne McCurrie, senior portfolio manager at Ashburton Investments. He’ll be taking us through the day’s market performance. Wayne, thank you so much for your time.

WAYNE McCURRIE:  Sure, no problem at all.

NASTASSIA ARENDSE:  The past couple of weeks have kept journalists very busy.

WAYNE McCURRIE:  Everyone has been busy.

NASTASSIA ARENDSE:  There’s been a press briefing and another press briefing, all over the place. But what has it done for you guys who sit on the side, at your desks with the numbers? How are you taking this entire week?

WAYNE McCURRIE:  Well, we’ve lost money.

NASTASSIA ARENDSE:  That’s not good.

WAYNE McCURRIE:  Not only have we lost money – the country is poorer. But I think let’s look at a few things. All this junk status is very confusing for people who don’t work with these things day to day.

We are junk now. S&P has downgraded our foreign debt to junk, which is about 10% of our debt. Fitch has downgraded all of our debt to junk – foreign and local. They don’t differentiate between the two.

Now, what everyone is worried about is this forced selling. A lot of investors are not allowed in terms of their mandate to invest in junk status. There are some funds that are already affected by this, but the big dog, the one that truly matters, is not yet junk status

That will happen when S&P downgrades our domestic debt to junk, and Moody’s downgrades all of our debt to junk. That has not happened. Of course, we can have a long debate as to whether it will happen or not. I think if things don’t change it will happen, but it’s not imminent. There is quite a bit of time to go until they actually do it. How long? Of course, they could always have an emergency meeting but more than likely in my view that’s not going to happen for four or five months. And, as we’ve learnt in two weeks, four or five months in South Africa is an incredibly long time.

So, just to put things right, talking about the rand for what it’s worth, taking into account different circumstances, more specifically the far-better commodity cycle – because we are a commodity exporting country – taking that all into account and together and putting it in the pot and stirring it, more than likely if the truly worst does happen, the rand is going to R14.50 or R15/dollar. It’s not going to R17 or R20 or R25. So that’s just to put that into a little bit of context.

You could also argue why the rand is at R13.80 – why isn’t it worse? I don’t know the answer to it. All that I am saying is the market knows all of these things – it knows the probability of downgrade, it knows when it’s going to happen, it knows that with the changes that we’ve had in the past two weeks these downgrades are coming unless something changes. That is the value it puts on the rand. It doesn’t put it at R15 or R17 or R20. It puts it at R13.80.

So after Fitch downgraded today the market is unchanged because it knew it was coming. If nothing changes and S&P and Moody’s downgrade us to junk, the market knows this is coming. It’s not going to be new news to the market. We must understand everything in context.

Maybe another way of explaining it is the banking shares. The banking shares have been slaughtered because under this set of circumstances banking shares get slaughtered. That’s a natural reaction to what’s happened. When you look at the current valuation of bank shares, they are now as cheap, for want of a better word, or more correctly as lowly valued now, as they were when Nene was fired. So you can also argue a lot of the bad news is already in that price, because they have been slaughtered as much as they were when Nene was fired. Comparing that to the global financial crisis in 2008, they’ve also fallen about 75% of what they fell in that. So a lot of bad news is already there – we see it.

NASTASSIA ARENDSE:  Going into next week, more heart palpitations, or should we just stay calm and wait and see what happens?

WAYNE McCURRIE:  Look, you can never, ever panic. The worst investment decisions are made when people panic. And, by the way, it’s not just panicking on bad news. Sometimes people panic when there is good news. They panic both ways, in and out. You’ve just got to sit back and say, let’s wait and see what’s happened. Let’s evaluate first of all circumstances; secondly, the actual pricing of shares, the pricing of bonds, what is in the price already. And then make decisions from that level.

Maybe just a last thing on this subject. Overseas investors have come across junk status many, many times before. In fact, there are more countries now in the world that are in junk status than we have ever seen since we’ve had junk status. It’s not a new thing. I’m not saying it’s a good thing, I’m just saying it’s not new to global investors.

And secondly, global investors will take their money anywhere, as long as they believe that the return they get compensates them for the risk. It’s not as though when you go junk status you don’t get money – you just pay a lot more for that money.

Maybe the best analogy, which I heard today, which really struck a chord with me – and maybe this is a little bit of news, because sometimes you’ve just to throw some good news into the pot – is this. Effectively global investors are looking at us and saying the following. They are saying all junk status countries are ugly, but South Africa is still one of the most beautiful ugly countries.

NASTASSIA ARENDSE:  We’ll leave it there. Thanks, Wayne. Wayne McCurrie is a senior portfolio manager AT Ashburton Investments.

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