In a reversal that many commentators saw as an attempt to claw back some of the ground lost both on the economic and the political front as a result of his initial decision on Wednesday to fire finance minister Nhlanhla Nene and replace him with unknown Douglas van Rooyen, Zuma appointed Nene’s predecessor, Pravin Gordhan, to the post.
Old Mutual was up 7.6% in London, while Investec rose 8.8% to roughly the same position the two firms’ were sitting at before Wednesday evening’s shock announcement.
Still vulnerable
But, while the new appointment of a known entity and a respected figure within financial circles has stemmed some of the bleeding on the economic front, the country’s banking sector still remains vulnerable, a fact evidenced by the downgrades announced on Friday by Fitch Ratings. The agency cut its ratings on Nedbank, Standard Bank, First Rand Bank and Absa Bank, although it affirmed its rating for Investec.
The rating comes as a result of the agency’s decision to downgrade its view on the country’s sovereign debt to one notch above junk on the back of South Africa’s growing debt burden and sluggish economy.
“Under Zuma’s government South Africa has not taken the necessary steps to reform the country."
Earnings down
But, while Investec’s Fitch rating was affirmed, the political vacillation and plunging currency saw Numis Securities cut its forecasts for the bank.
Numis said it now expects earnings per share to come in at 41p this year, 3.5% lower than its previous forecast, while the following year’s EPS is expected to be 43.3p, 8.5% lower.
“We have significantly reduced our expectations for economic recovery in South Africa and have also reduced our loan growth forecasts. The lowered credit rating is not expected to materially impact the group’s funding costs but does represent the weaker operating environment and macro economy,” it added.
“While Investec is undoubtedly an EM exposed business, its high value Asset and Wealth businesses are more UK biased. We believe the share of UK profit will grow strongly over our forecast period. Furthermore, we believe the market is currently effectively valuing the South African bank at zero,” it said.
Reform needed
At a broader level, Heinz Ruettimann, strategy research analyst emerging markets at Julius Baer said while the combination of the ratings agency downgrades and the removal of the finance minister were tipping points, they are not the sole reason for the performance.
“Under Zuma’s government South Africa has not taken the necessary steps to reform the country. Today, gross economic growth amounts to a lacklustre 1% and the current account as well as the budget are in deficit with -4.1%. Investors have lost confidence and are now taking flight by selling. The MSCI South Africa is too expensive. Year-over-year earnings growth is negative with – 18% in USD terms,” said.
