from the desk of the principal officer

For the last two years South Africa has been battling to avoid downgrade to the dreaded “Junk Status”, or in more correct terms “below investment grade” status. Much to our frustration, this has finally transpired. Ironically, the downgrade by ratings agency S&P, may well galvanise South Africans to pressure for a change in the “new” status quo.

1. The Downgrade

Decisions have ramifications. That is what became clear when Standard & Poor’s (S&P) downgraded South Africa’s Long-term foreign currency rating from BBB- to BB+. South Africa’s long term local currency rating was also dropped a notch from BBB to the lowest Investment being BBB-.

At this stage, all the ratings agencies still have South Africa’s local currency debt at Investment Grade (IG) and therefore there should be no immediate selling pressure on global investors who are benchmarked against various global bond indices. However,

  • Should South Africa’s local long term currency rating be downgraded one further rating notch, it could exit the JP Morgan Government Bond Index (Emerging Markets Global).
  • Should the country be downgraded by two notches, it could exit the Barclays Global Aggregate Index.
  • S&P and Moody’s would need to cut the local currency ratings to sub-IG for South Africa to be exited from the Citi World Government Bond Index.

For much of the last two decades, in which South Africa has previously been below IG at a point in time, the South African government has ultimately made choices which have justified investment grade and improved the lifestyle of most South Africans. We do not believe, however, that economic prudence and prosperity are mutually exclusive. Anybody making an investment decision needs confidence and a lack of confidence leads to limited new investments. If South Africa still wishes to be part of the global economy it needs foreign investment and foreign financing. Capital has no agenda and merely flows where the returns are best for the level of risk taken.

The immediate result of the downgrade has been a weaker Rand. Currency depreciation creates an environment which promotes higher inflation and higher interest rates. It imposes a cost on all South Africans and has disproportionately negative consequences for the poor because it increases the cost of petrol and food. In the longer run the erosion of business confidence has a cost in the form of less investment and slower economic growth.

We will, as always, act as responsible custodians of our members’ retirement money and thankfully we have a number of options on the JSE in which to invest our members’ money which protects them well from a deterioration in South African fundamentals while still growing capital in real terms.

2. Impact on the Destiny Portfolios

Over the past 10 days, the Destiny Portfolios have actually increased in value by over 2%. A summary of the drivers that are influencing the short term growth of the portfolios is outlined hereunder:

  • Local equities
    Because more than half of the JSE is made up of non-Rand assets, the equity market typically rises when the Rand falls. What we are experiencing right now is exactly that, with Rand hedges rising and domestic shares (mainly financials) falling.
  • Property shares
    Local property shares are likely to remain under pressure, while those with foreign properties or earnings are likely to rise in Rands. The local shares tend to move in line with bond yields.
  • The Rand
    Although the Rand has weakened by over 11% during the period, it now stands again at similar levels to those at the beginning of the year. We sense that it is still pricing in some hope that opposition to recent events will still follow. If the current path is maintained we expect it to weaken further.

Destiny’s members benefit from our multi-manager, multi-style (active and passive blended investment style) and multi-asset class approach which diversifies investments across multiple instruments and asset houses.

3. In Conclusion

This diversification helps to protect investments from unexpected events in a particular asset class, whilst also allowing investments to benefit from different sources of return. At the same time, Destiny’s Portfolios have been relatively conservatively positioned due to our concerns about valuation levels and heightened political and economic risk, globally and locally.

We would like to reassure our members that we are focused on taking all factors into account as we continue to invest for the long-term. This approach has served us well through volatile markets in the past and we anticipate that it will do so now.

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