COVID-19 final straw for Moody’s: Equity market implications

Moody’s downgrade commentary from Chris Freud & Hannes van den Berg COVID-19 & SA Equity lens.

Mar 29, 2020

2 Minutes

Moody’s downgrade commentary from Chris Freud & Hannes van den Berg COVID-19 & SA Equity lens.

The South African equity market has already been battling to deal with the fallout from COVID-19 over the last month. When analysing the business models of companies listed on the JSE, it is clear that the supply and demand dynamics of all companies have already been disrupted and affected by the global lockdown in one way or another. Not only are revenues of most companies being squeezed, but the current situation has the real potential to cause severe balance sheet stress for some companies.

Due to the surge in local bond yields in recent weeks pre-downgrade, South African companies are already facing a much higher discount rate, with the commensurate negative impact on equity valuations. Any further rise in bond yields due to the downgrade will exacerbate this problem. As a result, any impact of the downgrade on bond yields over the next week will be key to understanding the transmission mechanism to the SA equity market. In addition, although the Moody’s downgrade comes at a time when there is so much else to worry about economically and otherwise, to the extent that this further depresses consumer sentiment, this is likely to additionally reduce growth prospects for the bulk of JSE listed companies.

The combination of a weak rand (which is partially due to tight global US$ liquidity), rising discount rates and disappearing demand means that the SA Inc companies (banks, insurers, retailers and property) are likely to face a more difficult trading environment and potentially some balance sheet pressure. If the downgrade exacerbates these problems, SA Inc. will face further pressure. However, the JSE market capitalisation is very skewed to large external, global companies such as Naspers, BHP Group and British American Tobacco. For these companies, any prospective rand weakness will make them more attractive for an SA equity investor.

In this volatile environment, the downgrade is another negative event that the SA Equity market will have to price in and deal with in the next few days. The medium-term impact will be determined by the government’s response: does the downgrade catalyse reform – as it did in Brazil? Or does it allow the left leaning portions of the ANC to increase state dominance? That is what we need to watch to determine the longer-term equity impact.

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Authored by

Chris Freund

Co-Head of SA Equity & Multi-Asset

Hannes van den Berg

Co-Head of SA Equity & Multi-Asset