The blow to Johannesburg-traded stocks from a potential downgrade of South Africa\u2019s credit rating is likely to be hardest in banks and retailers, the sectors most vulnerable to local shocks.<\/p>\n
S&P Global Ratings and\u00a0Moody\u2019s Investors Service are scheduled to give their assessments later Friday.<\/p>\n
A cut by both companies\u2019 ratings on South Africa\u2019s local currency debt to below investment grade would trigger outflows from rand-denominated bonds and\u00a0cause higher costs for local banks obliged to hold sovereign debt for regulatory purposes.<\/p>\n
The impact on stocks may be limited and short-lived, said Wayne McCurrie, head of portfolio management at Ashburton Investments Management, which oversees about $10 billion.<\/p>\n
Any slump in the local currency could benefit shares of exporters, companies with significant foreign operations and those with listings on developed-market exchanges that benefit from rand weakness, which have helped drive the benchmark index to record highs this month.<\/p>\n
\u201cOnly about 25% of our share market is truly related to South African domestic events and that\u2019s mainly the banks, financials and retailers — the effect of a downgrade is in fact very limited on our stock market,\u201d McCurrie said.<\/p>\n
\u201cThere will be some negative reaction, but a downgrade is more expected than not expected.\u201d<\/p>\n
An index of South African general retailers has dropped 4.3% this year, compared with the 19 percent advance in the benchmark gauge. Lewis Group Ltd. has led the declines, tumbling 40%. Woolworths Holdings Ltd. is down 22%, while Massmart Holdings Ltd. has fallen 12%.<\/p>\n
The banks index has gained 4.4%, supported by a 40 percent rise in Capitec Bank Holdings Ltd. Standard Bank Group Ltd. is up 11%, Barclays Africa Group Ltd. has dropped 11% and Nedbank Group Ltd. has retreated 9.7%<\/p>\n
The country\u2019s foreign-currency debt was downgraded to junk by S&P and Fitch Ratings Ltd. after former Finance Minister Pravin Gordhan was fired by President Jacob Zuma at the end of March.<\/p>\n
While S&P and Moody\u2019s may opt to downgrade Friday after South Africa\u2019s National Treasury flagged a widening budget deficit and rising debt levels in its October budget update, they could wait until the ruling African National Congress selects Zuma\u2019s successor as party leader in less than a month from now.<\/p>\n
\u201cA downgrade by S&P and Moody\u2019s of South Africa\u2019s local currency sovereign rating to non-investment grade is justified by the fiscal metrics portrayed in the new budget,\u201d\u00a0said Soledad Lopez, an emerging-market strategist at UBS Group AG in New York.<\/p>\n
\u201cWe wouldn\u2019t be surprised if this happens —\u00a0but we think both agencies might prefer not to act before the ANC conference.\u201d<\/p>\n
In any event, UBS expects volatility to remain high across Johannesburg\u2019s stock market and the firm remains neutral toward the MSCI South Africa Index, Lopez said.<\/p>\n