Junk status looms - what to do with your retirement funds | Fin24

Junk status looms - what to do with your retirement funds

Jan 11 2016 15:00
Wouter Fourie

There is no sugar-coating or second-guessing the meaning of a rating such as “junk status”.   

That is why the announcement in December 2015 by ratings agency Standard and Poor’s (S&P) to downgrade SA’s sovereign debt to negative credit rating status (BBB-), just one notch above “junk status”, has attracted many negative headlines.

It also partially contributed to the rand weakening substantially in December, breaching R16 against the US dollar for the first time. 

The rand was one of the worst-performing emerging-market currencies last year, losing 35% of its value against the dollar, according to INET BFA data.  

In essence S&P blamed low economic growth, electricity shortages and low business confidence as some of the reasons for its negative outlook on SA.

Following the S&P downgrade, Moody’s also adjusted its outlook on SA’s sovereign credit rating to negative from stable, saying there is an increased probability that economic growth will remain low for a prolonged period of time.

Moody’s, which already ranks the country just a notch above junk, said it expected increased pressure on SA’s fiscus due to the slower growth and increasing political pressure. 

The headline-grabbing action from the ratings agencies will add to the dull sense of panic among private investors and people on the cusp of retiring or with retirement savings as their primary income.

But before you panic and make rash decisions, consider the following: 

1. We are not alone

By having our investment status downgraded to negative, we join other emerging markets such as Turkey and Brazil, which have seen their ratings drop last year. By all accounts we will see more emerging markets receive a downgrade as investors return to larger growth markets and become more averse to the higher risk that many emerging markets offer.  

2. The markets have already reacted

The downgrade to negative status has been expected and much of the reactions to this, such as a weaker exchange rate or drop in stock market values, have already occurred as investors reacted to the expected news ahead of the announcement. This means that any panicked investment decisions you make now will not save you from the expected negative market reaction. 

This is an excerpt from n article that originally appeared in the 14 January 2016 edition of finweek. Buy and download the magazine here


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