SOUTH African markets opened the week on a high and traded in the green yesterday as investors digested the latest sovereign credit ratings outlook and the ongoing peace talks between Russia and Ukraine.
Moody’s Investor Services on Friday upgraded South Africa’s credit rating to investment grade with a stable outlook as high commodity prices continue supporting the government’s efforts to reduce budget deficit.
This saw South African stocks trading on a high yesterday, with the rand steadying around R14.60 to the US dollar, but struggling for momentum.
The rand has shown reduced volatility this year in comparison to other emerging market currencies, and this is also likely reflective of its somewhat reduced credit risk as markets perceive a lower risk of default.
The risk sentiment in the markets saw the JSE All Share index rising to a three-week high of 76 361 index points by lunchtime.
Stocks on the JSE were driven by gains in technology and commodity-linked stocks, as Naspers rose 3.6 percent to R1783 per share in intraday trade, while AngloGold Ashanti was 2.5 percent higher to R358.59 per share and retail giant Woolworths hiked 3.9 percent to R60.77 per share.
Moody’s latest review followed that of Fitch Ratings, which removed its negative outlook in December last year as 2021’s medium-term budget lowered South Africa’s debt projections on strong fiscal performance.
The credit rating agencies still highlight risks, which could see downgrades for South Africa.
They warn particularly of the risk of weak growth, additional financial support to state-owned enterprises, or other factors leading to renewed deterioration in its fiscal strength, which would likely lead to a rating downgrade.
Investec chief economist Annabel Bishop said the longer South Africa maintained its lowered debt and deficit projections, this strengthened support for the rand.
“South Africa’s expected case probability of no downgrades has increased, and reflects a more certain environment for SA’s state finances, although reforms to the onerous regulatory burden and [to the] polices impeding free market dynamics... are urgently needed to bolster growth,” she said.
“A policy response more in tune with the economy, financial markets and investor confidence is benefiting SA and the rand, allowing for differentiation in SA’s favour between emerging market currencies, appreciated by the rating agencies.”
Meanwhile, the peace talks between Russia and Ukraine are yet to yield any positive concrete outcome, but investors are relieved by Moscow agreeing to remove some of its troops around Kyiv.
However, investors continue to assess the situation as the Ukrainian government recently accused Russia of “war crimes” taking place in the north of the country, sparking anger among many EU leaders and a call for more sanctions on Russia.
Exinity chief market strategist Hussein Sayed said the latest recovery in risk had come despite many warning signals, and it reflected how resilient equity markets had become in facing tough challenges.
“Ever since the coronavirus pandemic, investors have followed a “buy the dip” strategy, which worked exceptionally well in the successive waves of that crisis,” Sayed said.
“But the environment this time is different, with an ongoing war that no one knows how will end, inflation at levels not seen in decades, and central banks trying to speed up the tightening cycle as they fall behind the curve.”
BUSINESS REPORT ONLINE