Global Investing

Anticipating the fallout from South Africa’s ratings reviews

South Africa is due ratings reviews this Friday. Chances are that the Standard & Poor’s agency will cut its BBB rating by one, or possibly even two notches.  Another agency Fitch has a stable outlook on the rating but could still choose to downgrade the rating rather than the outlook. What will be the damage?

There is undoubtedly a link between ratings and bond prices.  So a one-notch ratings downgrade tends to lead to roughly a 20 percent increase in bond yield spreads and credit default swaps (instruments that are used to hedge against default), according to calculations by JPMorgan. But in South Africa the lower credit rating may already be already reflected in asset prices — Panama, Brazil, Colombia, Philippines, Uruguay, Indonesia, and Romania carry lower sovereign credit ratings but boast lower CDS and dollar bond yield premia over Treasuries.  Russia and Turkey have lower average ratings than South Africa but their debt and CDS spreads  are roughly on the same level.

So a ratings cut is unlikely to trigger huge outflows from South African debt markets, says JPMorgan, which runs the most widely used emerging bond indices. In Brazil for instance, a well-anticipated  downgrade back in March did not lead to significant cash outflows from its markets, JPM points out:

The current relationships between spreads and ratings do not necessarily imply another step wider in South Africa’s spreads until it is firmly sub-investment grade (not J.P. Morgan’s base case).

Secondly, even after a downgrade to BBB-, South Africa would still be rated investment grade, so investors will not be required to sell their holdings.  On local currency debt, South Africa is rated A- from S&P so a 1- or even 2-notch downgrade should have no technical impact the bank argues.

from Jeremy Gaunt:

Micro versus macro

There is little doubt that the latest U.S. earnings season has been a good one for long-equity  investors. Thomson Reuters Proprietary Research calculates that with 67 percent of S&P 500 companies having reported, EPS growth -- both actual and that still forecast for those who have not filed yet -- has come in at 36 percent.

Furthermore, a large majority of the reports have surprised on the upside, as they like to say on Wall Street.  Some 75 percent of  reports have been better than expected.  Not surprisingly, the S&P index gained around 6.9 percent in July and is up another 1.7 percent in the first two trading days of August.

But given what looks like at least a faltering U.S. economy with little consumer confidence, some analysts  have begun asking what there is to get excited about. Philipp Baertschi, chief strategist at wealth manager Bank Sarasin, for example, calls it a case of micro bulls versus macro bears and warns that it won't last.

Sell in May and go away?

“Sell in May and go away” — a strategy that implies that taking a good summer holiday is the best way to deliver returns — may seem like an out-dated axiom by which to manage a share portfolio, but research from S&P indicates that using a strategy this decade would have paid dividends.

Analysing the monthly performance of 16 European markets over the 10 year period from January 2000 to December 2009, S&P shows that the summer months are inauspicious for investing.RTXFFP2_Comp

Germany saw an average total return 0f 3.3 percent over the January to May period compared with an average loss of 1.4 percent over the June to August summer months, and a total return of 8.9 percent for the year as a whole, S&P says.

Fool me three times, shame on me

World stocks are up 22 percent since March 9 and a sell-off earlier this week was unable to break the trend.

“Like the old saying ‘Fool me once, shame on you, fool me three times, shame on me’, we think it’s OK to investors to be cautious, but not dismissive… We believe there is a good chance that we saw the low for this bear market in early March,” says Sam Stovall, chief investment strategist from the S&P Equity Research, in the Investment Policy Committee note.

The Comittee’s end-2009 targets are: 850 for the S&P 500 index and 675 for MSCI emerging market index.

Everybody down

Thomson Reuters proprietary research shows the estimated earnings growth rate for S&P 500 index companies in the first quarter of this year to be minus 31.4 percent. As the chart below shows, all 10 sectors that comprise the index are expecting an earnings decline relative to a year earlier.

Slip slidin’ away

Thomson Reuters Research and Estimates finds that the blended growth rate for S&P 500 companies for the fourth quarter of 2008 now stands at -28.1 percent.  The blended growth rate combines actual earnings reported with estimates of those yet to come. What a decline.  On July 1st, the estimated growth rate for Q4 2008 was 59.3 percent; on October 1st, the estimated growth rate for Q4 2008 was 46.7 percent; and on January 1st, the estimated growth rate for Q4 2008 was -1.2 percent. If the final growth rate for Q4 2008 is -28.1 percent, it will mark the first time the S&P 500 has recorded six straight quarters of loss since Thomson Reuters began tracking earnings growth rates in 1998.