On Wednesday morning, I saw a tweet from Professor Adrian Saville, the chief investment officer at Cannon Asset Managers which said: “I think Ratings Agencies should rebrand as Reaction Agencies. SARB has done a good job with ABIL”.
While I think I understand the sentiment that Saville is expressing, I do think his criticism is a little unfair.
Leading South African economist Colen Garrow made the following point on Wednesday morning on Twitter
Love them or hate them, Rating agencies flagged their concern about unsecured lending a LONG time ago
— Colen Garrow (@ColenGarrow) August 20, 2014
Garrow is correct. In a lot of cases the South African investment public chose to ignore their warnings because the stock market was flying and enormous wealth was being created. Now the agencies have – rightly or wrongly – thrown up additional warning signs and suddenly share prices at market darlings like Capitec are under pressure.
I say ‘rightly or wrongly’ because depending on where you sit, the ratings agencies serve two different purposes.
Let’s look at Capitec (JSE:CPI) for a moment because it is spitting mad about the downgrade from Moodys Investor Services and for being placed on review. Absolutely, African Bank Investments Limited (Abil) and Capitec operate two completely different businesses, but the reality is that they are ultimately driven by the same fundamentals – the state of the SA consumer.
On July 4 2013, Abil has its outlook changed by Moodys from Stable to Negative. Abil tells shareholders at the time: “Commenting on the outlook downgrade Leon Kirkinis, ABIL’s chief executive, noted that the Bank was confident that it has already implemented the necessary risk reduction measures and has continued to strengthen the provisioning buffers, to maintain and grow the business on a healthy and sustainable basis.”
Thirteen months later Abil is in curatorship and R10 billion in market capitalisation disappears. I’m pretty certain that if Moodys had been more aggressive, this would have hit Abil far sooner.
While not directed specifically at Saville’s comment, I would caution that we need to be careful that we don’t start suffering from “share price blindness” and fail to see the warning signs that are being waved in front of us. On Tuesday we saw retailer Shoprite clobbered, while resource giant BHP Billiton indicated it’s considering exiting a lot of South African investments. Moody’s also cut the ‘big four’ banks’ investment ratings by one notch and put them on review.
We see ever more frequent service delivery protests and people are becoming more and more frustrated with the inability to find jobs.
This is what the ratings agencies are trying to warn about. Not the Capitec share price.
Retail shares – specifically Shoprite – have pumped over the last decade as have the banks and people have made a lot of money, but the party is now over.
To Garrow’s point, an economy is about confidence. The banks are being downgraded and so is Eskom and the cost of funding is going to go up. That’s capital that can’t be deployed elsewhere.
While I do believe that the ratings agencies models are flawed, I do believe that we can’t ignore the warning signs from them.
** Don’t forget that you can hear Adrian Saville speaking at the 2014 Inspiration Indaba. Click here to buy tickets to attend the indaba.
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