With Moody’s having recently revised their stable outlook on South Africa’s credit rating to negative, a future downgrade from the ratings agency seems increasingly imminent. While uncertainty remains rife around what the exact economic consequences of losing investment-grade status will be, there is little doubt as to how markets will respond.
This is according to Fareeya Adam, Head of Retail Product Solutions at Momentum Investments, who cautions South African investors of the possible heightened volatility of returns over the coming months.
“Moody’s current Baa3 credit rating is the only thing keeping South Africa from slipping into junk status. This means a Moody’s downgrade will trigger a mass sell-off of rand bonds and potentially equities too. While analysts can’t seem to agree on whether this downgrade has already been priced in or not, one thing is for certain: our markets are in for a bumpy ride.”
For local investors with a limited appetite for this kind of market volatility, Adam suggests the option of fixed-return products. “Depending on their life stage or their view on risk, there are lots of people who want to avoid volatility in returns. For these people who are seeking the security of returns without the risk of market movements, fixed-return products can act as a safety net by providing valuable capital protection.”
This, Adam says, is what drove Momentum Investments to launch the Linked Endowment Growth Option – a structured investment product that provides a fixed after-tax maturity value at the end of five years, regardless of market movements.
“The value of this product is based on assets from South Africa’s leading banks, and the endowment is underwritten by Guardrisk Life Limited,” says Adam. “We find the bank that offers the highest return to the client and only work with the top five South African banks in order to limit default risk.”
To this point, Adam notes that South Africa has a well-developed banking and financial market, and the South African regulatory authorities are continuously following and implementing international best-practice initiatives.
She adds that investors looking for income during the five-year term can choose to include a Momentum term-certain annuity with the defined maturity value. In this case, the investment amount will get split into two policies. One part purchases the Linked Endowment Growth Option, and the other purchases the five-year Momentum term-certain annuity.
While this new product has already seen major uptake among middle-aged, pre-retirement clients, Adam says she expects broader interest to be piqued by the continued market uncertainty. “Solving for medium-term investment goals, the Linked Endowment Growth Option is well suited to any investor who doesn’t need access to their money for five years and wants to avoid the risk of market returns.
“The reality is that market returns have been relatively muted over the last five years – even before the impact of tax. Given that South Africa’s investment-grade credit rating is now hanging by a thread, we expect the appeal of fixed-return products to grow even further and believe this offering is perfectly positioned for this.”
The Linked Endowment Growth Option is available to both individual investors and trusts with natural persons as beneficiaries, with a minimum lump sum investment amount of R50 000. For more information go to momentum.co.za.