It has been a bumpy ride for global asset managers, as the pandemic exacerbates latent macroeconomic challenges. With rating agencies downgrading Sovereigns and some of the world’s renowned big corporates, there seems to be no “safe haven” any longer, as the hitherto “risk-free” instruments are increasingly being challenged by economic and market uncertainties. Sovereigns are faced with the twin challenges of low fiscal revenue and the dire need to increase health and social security spending on the back of the pandemic, a double whammy which is aggravated in African countries, where latent socioeconomic challenges have heightened economic and market uncertainties.
Corporate earnings are projected to remain relatively weak due to the resurging stagflation paradox, especially in markets like Nigeria, where headline inflation has risen for nine consecutive months to 12.82percent in July, with notable upside risks in the months ahead. Paradoxically, rising unemployment and waning purchasing power continue to weaken aggregate demand, a phenomenon which may undermine corporate earnings and cashflows over the near term. Proactively and reactively, rating agencies are expected to remain busy and bearish over the near term, as the agencies continue to reassess market conditions and unsystematic risks of each issuer to re-rate or issue downgrade warnings.
As of June, Fitch Ratings has placed more than 20percent of its coverage corporates on negative outlook or rating watch negative, a precursor to full rating downgrade, as 50percent60percent of such rating action has historically resulted in full rating downgrade. Interestingly, the rating action has been broad based, covering financials, energy, manufacturing and utilities amongst other sectors, a phenomenon reinforcing the wide-spread risk occasioned by the pandemic.
Unsurprisingly, most of the rating downgrades have been on non-investment grade corporates and instruments, with less than “BBB” credit rating. In addition, a number of border-line investment grade corporates like British Airways Plc, Delta Air Lines, Renault SA and Arcelormittal S.A amongst others, which hitherto had “BBB” ratings are now on speculative ratings of “BB+”, with negative outlook, which indicates potentials for further downgrade.
