How does “junk status” affect your investments?

Gustav NeethlingArticleLeave a Comment

junk status

Last Friday Standard & Poors, a very important ratings agency, kept their credit rating for South Africa the same – one notch above the so called speculative or junk status. This was largely the consensus view of the global market (ours included). However the bad news is that a downgrade in December looks like a foregone conclusion.

The market reacted very positively (as if it was a bit of a surprise!) and we all cheered and drank champagne to try and forget the dismal position we find ourselves in. But what does this all mean to investments – current or new investments? In previous blogs we mentioned that there are four broad investment types or asset classes you can invest in namely :

• Cash
• Bonds
• Property
• Shares

When a ratings agency downgrades you, it effectively is telling the world that your risks have increased and that if anyone lends money to you they need to be more careful because there is a risk that you won’t be able to service the debt. All governments are divided into investment grade or speculative grade buckets. Most developed economies fall in the investment grade bucket as they have shown to be able to successfully service their debt over many years (like the US/UK/Europe).

The speculative economies are still developing economies and as such things can go wrong which makes them more risky than the investment grade economies. The net effect is that the interest rate at which those economies need to borrow money are much higher than their developed peers. This puts further pressure on those already fragile economies and the circle continues.

It is important to understand that you don’t get downgraded and then your economy becomes weak – your economy is weak and that is why you get downgraded.

South Africa is facing a mountain of problems and the solutions are complex and not everyone agrees on the correct direction (the ratings agencies are of the opinion that our current policies are not working and need revision).

But what will the impact be on my investments in the future? The reality is that we are not 100% sure. Most people however agree that most of the bad news has already been priced into the market and that prices are already fairly depressed – this includes our currency which has depreciated significantly the last 12 months.

We are therefore not that concerned with the immediate effect (on the day we become “junk”) – the reality is however that the returns going forward will most definitely be less than in the immediate past until the problems are resolved. This does not mean that you should disinvest or even worse not start to invest. There will be increased pressure on you to prepare a proper investment plan and execute it diligently.

WealthPro will be able to help you with your investment plan. Just follow these steps to create your personalised plan :

1. Register for free
2. Identify your different goals
3. Allocate goal amounts or contributions to each goal
4. When ready start to save in the investment

WealthPro will ensure that the correct asset allocation is linked to each goal and help you to monitor the investments as we move through the different economic cycles.

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