Sell your rands for dollars and euros, JPMorgan warns investors
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Following similar sentiments from local economist Dawie Roodt, international investment firm JPMorgan has advised investors to get out of the rand ahead of a possible junk rating downgrade.
“The market is too optimistic that downgrades would be postponed and/or on the outcome of the ANC’s December elective conference,” said Anezka Christovova, a foreign exchange strategist at JPMorgan, quoted in an investor note sent out this week.
“We share neither of these hopes,” she said. “We believe current ZAR levels reflect complacency in the face of imminent sovereign rating downgrades.”
“Currently USD/ZAR is only 1.5% weaker than what is consistent with US yields and an index of other EM FX. In periods of stress, this deviation can easily rise to 5-10%,” Christovova said.
While South Africa has already faced a downgrade to full junk status by at least one ratings firm (Fitch), both S&P Global and Moody’s have a the country at head above water.
S&P has downgraded South Africa’s foreign currency debt to junk, but because the country’s debt is mostly carried in rands (which is still one notch above junk at S&P) the full impact of sub-investment grade has not yet been felt.
Moody’s is currently the only agency that has SA above wholly above junk status, with both local and foreign currency debt sitting at one notch above junk.
If South Africa loses both its investment grade ratings, however, its government bonds would be excluded from the Citi WGBI local-currency bond index.
This would see index tracking funds and investment grade credit funds forced to sell their South African holdings, and as a result, Christovova believes that sovereign rating downgrades by both S&P and Moody’s would trigger about $5 billion – $7 billion (R70 billion to R100 billion) of forced outflows.
She also noted that JPMorgan was skeptical that the December ANC conference would bring any relief from “the structurally low growth and fiscal challenges”, and that the “continued fiscal deterioration also depresses substantially the long term fair value for ZAR.”
Local analysis
On Monday, economist Dawie Roodt advised South Africans to take their money out of the country amid looming downgrades which would send the economy into another recession.
Speaking to IOL following the release of the auditor general’s report on the financial health of state-owned entities last week, Roodt said that the country is in dire straits.
The reports showed that irregular expenditure in South Africa increased by 55% since 2016 to R45.6 billion and could still rise to R65 billion as 25% of those audited acknowledged that they had incurred irregular expenditure, but could not say how much.
“We’ve reached the end of the line. Pushing the economy into recession is the only option. The best advice I give to my clients is take your money out of the country,” Roodt said.
Roodt’s position echoed sentiments expressed by many other economists and analysts, who say that South Africa is on a downward trajectory, with a rating cut to full junk status an inevitability.
“It is highly unlikely that we will retain our current ratings for the next 12 months and we need to adjust our base case to be that South Africa will be kicked out of the WGBI government bond index,” analysts at Anchor capital said.
The expectation should be that rates will gravitate towards 10.25% and the rand towards R15.00 to the dollar at some point over the next year.
While most are bleak on the prospects for South Africa, academic Dr Conrad Beyers warned against taking a ‘hysterical’ approach to the country’s economic woes, and acting rash by taking all invested money out of the country.
According to Beyers, “physically taking money out of the country” is not the only way to protect savings against a weakening South African economy, and investing in JSE listed companies or unit trusts with significant international exposure is another way to hedge savings.