In the event that the S&P downgrades SA debt to subinvestment grade in June, would buying Resource stocks be the way to go? I assume that a downgrade would result in a drop in equities in general but would resource shares be spared based on the attractivness a weak rand would give to stocks of that nature?
Nothing will be spared as investors (especially foreign funds) will start liquidating positions because of policies dictating that they can't invest in junk rating countries. Expect a BIG outflow of capital. You can benefit by buying ZAR hedge EFT's and shares like DBX ETF's, Astoria, Reinet etc.
From data published in 2015. BHP has about 80% foreign ownership, Anglogold 80% and Anglo America around 65%. If we get subinvestment grade I expect that these stocks would be most susceptible to a major sell off from foreign funds. Maybe a short on these companies may be the way to go...?
Other than ANGLOGOLD - those are all foreign companies - so No! In fact - in my opinion it is more likely that the local demand for these companies under a collapsing RAND would cause them to break higher. As for ANGLOGOLD - in the short term - she is a slave to the ZAR gold price. You never short her because the Rand is falling! Why does everyone want to short things lately? Is it because we have been falling for so long? Surely that is a cause for caution?
here is a hot tip for you guys. Markets trade rumor, not fact. So the ratings downgrade is not exactly privileged information and the expected movements are already in effect. Short the banks and financial stocks, and go long resources. Only, this should have already been done - since it is almost too late now to make a call on this anymore.
Ordinarily I would agree - but I think there could be more pain after the usual counter trend bounce to flush out the shorts. Many sellers who have held off to date - will have there hands forced once the downgrade actually occurs. That said - you're right that it probably is too late to start setting up "trades" for this. Have you also noticed this intense need to short everything among forumites lately?
Do note that a ratings downgrade on SA Gov doesnt mean that every bond in SA is downgraded. SA gov can be downgraded to junk but (eg) FNB can still be A rated. There are further down-the-line impacts though as government has less money to pay infrastructure etc, but the effects are not immediate.
For anyone interested in this why not rather look at the impact on Brazil and Russia...both got downrated a while ago...didnt even impact Russia
I don't agree that it's largely priced in. Many fund mandates will prevent them from selling if it's above junk rate. It's a business rule that will only kick in when the rating actually comes into effect. You get that rating, you WILL get selling, and almost anything with foreign money in it will be smacked.
It is a ratings agency rule (convention) that sovereign debt rating dictates the upper limit rating of corporates under that regime. I doubt they'll stray from that for our little mickey mouse dictatorship.