Bank, Retail Stocks in Focus as South Africa Downgrade Looms

• Bank, Retail Stocks in Focus as South Africa Downgrade Looms

The blow to Johannesburg-traded stocks from a potential downgrade of South Africa’s credit rating is likely to be hardest in banks and retailers, the sectors most vulnerable to local shocks.

S&P Global Ratings and Moody’s Investors Service are scheduled to give their assessments later Friday. A cut in both companies’ ratings on South Africa’s local currency debt to below investment grade would trigger outflows from rand-denominated bonds and cause higher costs for local banks obliged to hold sovereign debt for regulatory purposes.

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. 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.

“Only about 25 percent of our share market is truly related to South African domestic events and that’s mainly the banks, financials and retailers — the effect of a downgrade is in fact very limited on our stock market,” McCurrie said. “There will be some negative reaction, but a downgrade is more expected than not expected.”

An index of South African bank stocks fell 1.6 percent by 11:41 a.m. in Johannesburg Friday, the most in four weeks. FirstRand Ltd. dropped 1.9 percent, Standard Bank Group Ltd. retreated 1.8 percent, Barclays Africa Group Ltd. fell 1.3 percent and Nedbank Group Ltd. was 1.1 percent lower.

The general retailers index was little changed. It has dropped 4.1 percent this year, compared with the 19 percent advance in the market’s broader benchmark gauge. Lewis Group Ltd. has led the declines, tumbling 40 percent. Woolworths Holdings Ltd. is down 21 percent, while Massmart Holdings Ltd. has fallen 13 percent.

The country’s 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. While S&P and Moody’s may opt to downgrade Friday after South Africa’s 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’s successor as party leader in less than a month from now.

“A downgrade by S&P and Moody’s of South Africa’s local currency sovereign rating to non-investment grade is justified by the fiscal metrics portrayed in the new budget,” said Soledad Lopez, an emerging-market strategist at UBS Group AG in New York. “We wouldn’t be surprised if this happens — but we think both agencies might prefer not to act before the ANC conference.”

In any event, UBS expects volatility to remain high across Johannesburg’s stock market and the firm remains neutral toward the MSCI South Africa Index, Lopez said.