SA’s Gone To Junk: Here’s How To Protect Yourself Today
We live in some incredible times in South Africa at the moment.
Over the last few years we’ve seen a number of political and economic hardships that’ve put the country in an extremely vulnerable position.
This was capped off with the recent cabinet reshuffle which saw Pravin Gordhan fired as Minister of Finance and replaced with Zuma’s apparent “yes-man” Malusi Gigaba.
This latest event has now triggered the much discussed downgrade.
In light of this, S&P was the first of the rating agencies to downgrade South Africa’s sovereign credit rating to a level that is below what is considered “investment grade”.
This sub-investment grade status is more widely known as Junk!
And the market has not taken this well.
In the last week, we’ve seen more than a 10% depreciation in the rand, South African bonds have followed suit, and many South African exposed stocks have also taken a beating.
Now more than ever it’s so vital for South African investors to protect themselves from this weak investment environment.
How can you do this?
Let me show you…
What Junk Status Means For You And Your Investments
First, it’s important to consider what a junk environment actually looks like.
I’m sure you’ve noticed that the apocalypse hasn’t exactly arrived?!
Banks have not closed, and while the rand has weakened we’re not anywhere closer to Zimbabwean Dollar levels.
So, then what does a junk status environment mean?
Sure, the country is not coming to a standstill just yet, but that doesn’t mean this isn’t very bad for the country.
In a nutshell, Junk status can have the following effects on an economy:
- Governments pay higher interest on borrowings. Given that SA already has very high levels of borrowings, our interest payments just got a whole lot bigger. Further government borrowing will also be done at these higher rates of interest. The more the government spends on paying its interest on its borrowings the less funds it has to inject growth into the economy, and provide assistance to its people. This can also follow through to business, and the average man in the street who are already indebted enough as it is!
- Many international governments, pension funds and large asset managers are mandated to only invest in “investment grade” territories. So investment funds may be diverted away from South Africa and invested elsewhere in more investor friendly countries.
- As you have already seen in the last week, a junk status typically means a weaker currency. This means a loss of buying power, where imports become more expensive, prices rise and the consumer feels the biggest pinch.
Given the fact that it’s taken other countries in a similar position an average of 7 years to regain their investment grade status, we could be in for a long and rough ride.
The only way for South Africa to get out of this mess is to see some stability in terms of our political landscape, and for our economy to ‘grow us’ out of this mess.
With the mess we’re seeing in government at the moment, and GDP growth barely above 1%, I can’t see this turning around anytime soon.
So, what can you do to protect your wealth in this kind of environment?
Three Profit Protection Tools That’ll Safe Guard Yourself From Junk
So, while it’s too late now for our country to avoid the drop to Junk it doesn’t mean you have to suffer too.
There’s no way to completely avoid it, but there are a number of protection-tools to keep you safe over the tough times ahead:
Protection Tool #1: Hard Assets
Hard assets like gold are referred to as safe haven assets.
Over the years whenever markets have panicked, time and time again owning safe haven assets have protected investors.
Gold is often seen as an asset that protects you from inflation and currency devaluation.
Remember that gold is priced globally, based on supply and demand, and its performance is not based on the outlook of any country.
Also, because gold is priced in dollars it means that it protects you from any weakness in the exchange rate of our rand.
Protection Tool #2: Foreign Currencies
Foreign currencies of developed markets like the Dollar, Euro and Yen are another way to protect yourself from tough times in SA.
The rand has already depreciated by more than 10% to the dollar in the last week!
By holding foreign currency, you’re protected from the depreciation of your local currency.
This can be a very effective way of hedging yourself from a devaluing currency.
Protection Tool #3: Foreign Stocks
While foreign currency protects you from exchange rate devaluation, it’s still a form of cash investment.
And for long term investors cash investments have proven not to be effective in delivering inflation beating growth.
So, if you’re looking at the big picture you need to look at foreign Stocks or foreign exposed businesses.
These are companies who do business in other countries that aren’t affected by what happening in South Africa.
They earn foreign currency, that gives protection just like I mentioned above, and they’re operating in economies that aren’t struggling as much as here at home.
Your Junk Status Profit Protection Plan
Junk status is far from ideal, that much is obvious!
But it doesn’t mean your investments and portfolio has to suffer.
Invest in junk status protection assets like the ones mentioned above to safe guard your lively hood as South Africa moves into some dark and difficult times for its economy.
Remember, you can look at hard assets, foreign currencies, and foreign stocks – all of which can form the bedrock of your profit protection plan.
Just because the countries status has been cut to junk, it doesn’t mean your financial wellness needs to be as well!
Until then, here’s to smart investing.
Analyst, The SMART Investor
The Money Lab
PS: I'm covering our recent drop to junk status in my next issue of The SMART Investor! I'll show you the exact stocks and assets, including buy and sell levels, you need to ride out the junk status storm. If you'd like to get your name down, and find out exactly what stocks and assets I'm looking at to profit from the junk debacle, simply sign up today! Just click here to see how you can get your name down in under 5 minutes. I'll see you on the inside!