Foreigners flee SA stocks, sending volumes on JSE tumbling

Foreign investors have accelerated their (net) selling of equities on the JSE, with sales 40% greater thus far in 2023 than in the same period in 2022. To last Friday, non-SA investors sold a net R103 billion of equities, versus R73 billion in the first 40 weeks of last year. Year to date, the JSE All Share Index is down 1.1%. (The flows picture for bonds, while still barely positive for the year, is down 70% versus 2022.)

Foreign selling has been a firm theme of the past four years, with the last burst of net buying being a ‘Ramaphoria’ induced pop in 2018, following Cyril Ramaphosa being appointed president. The decline began in the final years of the Jacob Zuma administration. This is according to a chart from Ninety One, understood to be part of a presentation to clients and published on X (formerly Twitter) by investor and well-known commentator Karin Richards.

Cumulatively, outflows are almost certainly more than $40 billion by this stage (the chart has data to May 2023). 

The steadily weakening rand impacts the returns of foreigners, and with domestic earnings growth moribund – or non-existent – there’s not an awful lot to be excited about. In dollar terms, the performance of our market is among the worst in the world. According to data from PSG Wealth Old Oak, the South African country ETF (exchange-traded fund) is the third worst globally when measured to Friday, 6 October. The ETF is down 11.3% this year; the two worst performers, Thailand and Hong Kong, are at -17% and -16%, respectively.

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It does not help that investors are pulling their money from emerging markets. A Bloomberg report this week noted that “outflows from US-listed ETFs that invest across developing nations as well as those that target specific countries totalled $3.12 billion last week”. This was the largest weekly outflow this year, where net inflows only total $6.86 billion.

If this trend continues till the end of the year, flows will be negative for 2023. 

These flows are important as mega-funds – such as the iShares MSCI Emerging Markets ETF, with close to R500 billion in assets – are forced to trim their holdings across the board if investors withdraw their capital. In August, there was sustained and substantial selling of three JSE shares, MultiChoice Group, Mr Price Group and TFG Limited, due to a rebalancing of the MSCI Emerging Markets Index. These three stocks were removed from the index due to South Africa’s weighting in it being reduced. One estimate put the outflow due to this selling at around R7 billion ($360 million). 

Writing in the June quarterly review for the Ninety One Value Fund, which he manages, portfolio manager John Biccard says: “The perfect storm of several factors has resulted in an unprecedented selling of SA equities by both local and offshore investors. These include political upheavals, load shedding, weakening commodity prices and the loosening of regulations around maximum offshore exposure for South African portfolios. 

“As a result, foreign investors have sold local equities for 48 of the last 54 months and now are positioned at half the benchmark weight in South Africa within the emerging market index. Local investors are fast approaching the 45% maximum allowed in offshore holdings. The result is a plethora of 7X PE and 7% dividend-yielding stocks, as the herd continues to sell quality SA stocks on 7% yields in order to convert their one rand into 5 US cents, and then buy US tech stocks on 0.5% dividend yields.”

Knock-on effects

One knock-on from these outflows has been a reduction in trade volumes and values on the JSE. Investors and market participants have been highlighting this recently. Last week, the JSE saw an average value traded of R15.8 billion a day (according to JSE data) versus R21.5 billion in the same week last year. This is a decline of 27%. Staying at these levels would put the JSE back at levels last seen nearly a decade ago. 

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This declining liquidity impacts share prices as there is simply not enough volume traded for proper price discovery.

This is particularly acute outside of the Top 40, although in recent months, volumes have been noticeably thin in even some of these large-cap shares. 

Analyst Keith McLachlan correctly diagnosed the problem in a prescient column on Moneyweb in 2020:

“In other words (and oversimplifying matters), the negative feedback loop on the JSE is as follows:

1. Investors sell stocks on the JSE to buy more attractive investments elsewhere, and
2. Capital flows out of South Africa (in many cases it will never flow back into the ecosystem), and
3. Therefore, our stocks see lower valuations (i.e. not rewarding shareholders for being listed), and
4. Higher (relative) costs associated with being listed (i.e. penalising shareholders for being listed), and
5. Thus, stocks either do not list (here) or, eventually, delist, and
6. Therefore, our market becomes less attractive to investors, and
7. Return to Step (1).”

It is no surprise that the remaining quality mid and small-cap shares trade on price-earnings (PE) ratios that are practically laughable – think low single digits. Many of these companies are being acquired and taken off the market, and there is no indication that the delisting trend will change anytime soon.

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What changes all of this?

Well, emerging markets could come back into favour, although rising geopolitical tensions (there are now two large wars underway in Europe and the Middle East) and higher interest rates globally mean a flight to safety, at least for the foreseeable future. 

Oh, and economic growth. With a constrained energy supply for the next (roughly) 24 months, there is little impetus for real growth. The South African Reserve Bank sees GDP increasing at 1% next year and 1.1% in 2025. Anaemic, at best.

This article is republished from Moneyweb with permission. Read the original article here.