The Daily Update - South Africa's woes

As if being knocked out of the ICC Champions Trophy by India wasn't enough, Moody’s has downgraded South Africa’s rating by one notch to Baa3 (with a negative outlook); both Standard and Poor’s and Fitch cut the country’s ratings to sub-investment grade, BB+, in April. Moody’s review, which started at the beginning of April, showed that although there are ‘a number of important strengths that continue to support South Africa’s credit worthiness’, a weakening institutional framework, uncertain policy and slow structural reform, and fiscal erosion are hampering growth.

Having been branded the ‘wait-and-see’ economy, South Africa has slipped into a technical recession this year, after two consecutive quarters of contracted growth, due to a sharp contraction in manufacturing and trade. To make matters worse, over a quarter of the population is unemployed; a problem which appears to be getting worse with Q1’17 unemployment recorded at 14-year highs of 27.7%. There are also the obvious concerns over the political climate, made worse by President Zuma’s reshuffle of the cabinet earlier this year, making what some called controversial decisions. Moody’s sees these risks ‘as posing a threat to near-and medium-term real GDP growth.’

The country’s fundamentals have obviously deteriorated, and weakening consumer and business confidence has seen a huge fall in foreign direct investment (FDI), thus a further drag on growth. In fact according to sources, FDI has plummeted over the past decade with South Africa receiving less investment compared with other emerging economies, including ‘poorer’ neighbouring countries. This weakening backdrop is one of the many reasons why we at Stratton Street do not hold any South African debt; despite the country remaining investment grade on a best rating basis and ranked 3 star on our NFA model.

There is also very little value in the country. By way of example, the sovereign’s 6.25% 2041 benchmark bond, rated Baa3/BB+, is currently offering an expected return and yield of just under 11%, with less than one notch of protection. Meanwhile Qatar 6.4% 2042, which is rated 6 credit notches higher, has an expected risk-adjusted return of 11.7% alone, with the addition of a 4.3% yield, and in excess of 4 notches of spread cushion.

Please read this important information before proceeding. It contains legal and regulatory notices relevant to the information on this site.

This website provides information about Stratton Street Capital LLP ("Stratton Street"). Stratton Street is authorised and regulated by the UK's Financial Conduct Authority. The content of this website has been prepared by Stratton Street from its records and is believed to be accurate but we do not accept any liability or responsibility in respect of the information of any views expressed herein. The information, material and content provided in the pages of this website may be changed at any time by us. Information on this website may be out of date and may not be updated or removed.

The website is provided for the main purpose of providing generic information on Stratton Street and on our investment philosophy for the use of financial professionals in the United Kingdom that qualify as Professional Clients or Eligible Counterparties under the rules of the United Kingdom Financial Conduct Authority (the "FCA"). The information in this website is not intended for the use of and should not be relied on by any person who would qualify as a Retail Client. Products and services referred to on this website are offered only at times when, and in jurisdictions where, they may be lawfully offered. The information on this website is not directed to any person in the United States. The provision of the information on this website does not constitute an offer to purchase securities to any person in the United States (other than a professional fiduciary acting for the account of a non-U.S person) or to any U.S. person as such term is defined under the Securities Act of 1933, as amended.

The website is not intended to offer investors the opportunity to invest in any Alternative Investment Fund ("AIF") product. The AIFs managed by Stratton Street are not being marketed in the European Economic Area ("EEA") and any eligible potential investor from the EEA who wishes to obtain information on the AIFs will only be provided with materials upon receipt by Stratton Street of an appropriate reverse solicitation request in accordance with the requirements of the EU Alternative Investment Fund Managers Directive ("AIFMD") and national law in their home jurisdiction. By proceeding you confirm that you are not accessing this website in the context of a potential investment by an EEA investor in the AIFs managed by Stratton Street and that you have read, understood and agree to these terms.

No information contained in this website should be deemed to constitute the provision of financial, investment or other professional advice in any way. The website should not be relied upon as including sufficient information to support any investment decision. If you are in doubt as to the appropriate course of action we recommend that you consult your own independent financial adviser, stockbroker, solicitor, accountant or other professional adviser. Past performance is not necessarily a guide to the future. The value of investments and the income from them may go down as well as up. An application for any investment or service referred to on this site may only be made on the basis of the offer document, key features, prospectus or other applicable terms relating to the specific investment or service.

Where we provide hypertext links to other locations on the Internet, we do so for information purposes only. We are not responsible for the content of any other websites or pages linked to or linking to this website. We have not verified the content of any such websites. Such websites may contain products and services that are not authorised in your jurisdiction. Following links to any other websites or pages shall be at your own risk and we shall not be responsible or liable for any damages or in other way in connection with linking.

By using this site, you should be aware that we may disclose any information that we hold about you to any regulatory authority to which we are subject, or to any person legally empowered to require such information.

This website uses cookies to improve user experience, by clicking the "I Accept" button below means you consent to the use of cookies on our website.