Moody's downgrade spooks JSE investors

Johannesburg - Moody’s decision to cut the local currency deposit rating for South Africa’s  big four banks did not only have an effect on their share prices on Wednesday, but is also pushed the rest of the JSE lower.

By midday, the Financial 14 index was already more than 1.5% lower, but the Industrial and Resources indices were also weaker despite positive international indicators from Wall Street.

It seems that all the negativity about the fallout of the African Bank debacle is also hurting the confidence of investors in other sectors. 

African Bank’s problems are, despite some management failures, also an indication of the state of the South African economy and investors are beginning to realise that the market’s high valuations may not be supported by earnings in future.

The strong reaction on Tuesday to Shoprite’s disappointing results, when the share price dropped at one stage by almost 9%, is strong proof of investors' growing concerns.

By midday on Wednesday, the All-share index was 0.60% lower on 51 053 points, while the Top 40-index was 0.59% softer on 45 923 points. The biggest loser was as expected the Financial index, which traded 1.59% weaker, but the Industrial index also lost 0.44% and the Resources index 0.39%.

It seems that the decision by Moody’s to downgrade the four big banks was not based on the financial position of those banks, but a perception that the South African Reserve Bank was willing to impose losses on creditors in case of an emergency, instead of protecting investors fully.

In the case of African Bank [JSE:ABL] the holders of debentures are expected to lose 10% of their investment.   

Moody's said while the Sarb's actions mitigated the risk of contagion across the banking sector, the regulator had indicated by its actions it was willing to impose losses on creditors.

"The one notch downgrade ... reflects Moody's view of the lower likelihood of systemic support from South African authorities to fully protect creditors in the event of need," the ratings agency said in a statement.

The South African Reserve Bank (Sarb) said it did not agree with the reasons given for Moody's downgrade.

Standard Bank [JSE:SBK] was the biggest loser amongst the big banks and traded almost 3% lower on R135.76. Barclays Africa [JSE:BGA], which took steps to protect investors in the Absa money market fund from losses due the African Bank debacle, was 1.99% weaker on R165.24.

FirstRand [JSE:FSR] was 1.89% softer on R42.46 and Nedbank [JSE:NED] lost 1.46% to R230.05.

Capitec [JSE:CPI], which lost almost 5% of its value on Monday after Moody’s cut its rating by two notches due to its exposure to the developing market, has weathered the storm and traded 0.37% stronger on R216.80.

Amongst the big industrial shares Richemont [JSE:CFR] lost 0.63% to R102.42, but SABMiller [JSE:SAB] was 0.03% better on R585.94 after starting the day lower.

Shoprite [JSE:SHP] lost another 2.51% to R141.85 on Wednesday and is now 11% lower than a year ago.

BHP Billiton [JSE:BIL], which lost almost 5% on Tuesday after it did not announce plans for a share buyback, was 0.34% stronger on R384.74. Anglo American [JSE:AGL] gained 0.10% to R280.01.