It’s ETF season across Africa

RYK VAN NIEKERK: Welcome to this Market Commentator podcast. My guest today is Donna Oosthuyse, she is the director of capital markets at the JSE. Donna, welcome to the show.

The JSE is currently very volatile; actually equity markets around the world are volatile. But in South Africa we are seeing an outflow from foreign investors and nearly R53 billion has left the country since the beginning of the year. Are you worried about this?

DONNA OOSTHUYSE: Thank you very much and it’s a great pleasure to be on your show. The market: if you look at the trading statistics that we produce, it shows the net selling by foreigners. Now, that doesn’t necessarily mean that money has left the country; it could be that foreign investors have sold equities and either moved to cash or moved to bonds or other asset classes.

In terms of the makeup of those statistics, this year the biggest has been SABMiller and AB InBev, so there’s clearly some activity that’s linked to the acquisition of SABMiller by AB InBev – that’s the bulk of what we’re seeing. We’ve seen some foreign selling of Barclays and also Naspers but again, Naspers is an emerging market global play and trades in other markets as well. Also on the Barclays side we’ve seen the announcements and the intent there, so that’s also event-linked, if you will. Generally speaking on the market as a whole we started seeing increased volatility around September last year, I think they called it the lift-off tantrum, when the market was really expecting the Fed in the United States to take action and when it didn’t we started seeing quite a lot of volatility.

Of course in the case of South Africa, that extended and deepened in December when we had changes in our ministry of finance. …the year started out with expectations that we would continue to see interest rate increases in the United States and so we saw increased activity in the bond market but continued selling out of equities. What’s happened is, since the opinion about interest rate increases in the United States has changed and keeps changing, coupled with continued quantitative easing in Europe and Japan, investors have turned to look for yield. So we have seen some inflows into our bond market this year, but on the equity side we still see some selling happening on the equity side.

RYK VAN NIEKERK: But in the South African context, the selling off of foreigners is seen as a benchmark for investor confidence in South Africa. Do you think it is an accurate measure to use?

DONNA OOSTHUYSE: I don’t think that the selling on the equity market necessarily is because, as I mentioned, they may be selling equities but moving funds into another asset class. So I think it certainly is an indication of investor interest in that particular asset class and to the extent that about 40% of our trade on the JSE is by foreign investors, it is a very important component.

I think we have to bear in mind as well that on the one hand you’ve got the play of investors looking for yield, on the other hand you have the concerns that have been raised about South Africa as an investment destination with regard to some uncertainty about sovereign risk ratings, with some certainty around the political situation in the country and so forth.

But what’s important to note is we’ve seen a very high level of trading since the beginning of the year: our value traded in the first quarter has been up 28% and the number of trades in the first quarter was up 17%. Last year we saw a higher level of growth in the number of trades and so the average trade size declined. This year we’ve seen higher value traded, higher growth in value traded, up 28% and about 17% up in the number of trades. So we’re seeing larger trades go through and the value of trade going up higher than the number of trades. So we’re seeing larger deals.

But I do think that towards the first part of the year we did see big inflows into the bond market. Thus far on a month to date basis those outflows have been negative. But I do think that this isn’t a proxy for balance of payments and capital flows, but it is a good benchmark indicator of how investors are seeing these particular asset classes at the moment.

RYK VAN NIEKERK: Many South Africans are investing offshore; the currency has devalued quite significantly since last year. Does that have a direct impact on the JSE?

DONNA OOSTHUYSE: I think the volatility in the rand certainly has had some impact and certainly when you convert prices of our equities and you convert some of the returns into hard currency, if investors are not hedged it does give some cause for concern.

But again, investors globally are looking for yield and if you look at our market, I’m looking just at the stats up until [May 25], on a year to date basis our Top 40 is up 4.2%; the mid-cap stocks are up almost 17%…

RYK VAN NIEKERK: Is that in rand or dollar terms?

DONNA OOSTHUYSE: These are in rand terms. The resources have had a very strong year. It was our weakest counter last year; resources are up 25%, the Resource 10. So we have had, in rand terms, good performance. Some global investors choose to hedge portfolios and some don’t and in rand terms our market has performed very well. The rand has been very volatile, as you mentioned, and very much sentiment-driven but we’ve got some big liquidity events that are going to be happening in the market.

As you know, we had the listing in January of AB InBev (Anheuser-Busch InBev) and they’ve been making announcements in the market periodically about how the approval process on that transaction is going. So it could be that somewhere in the range of R160 billion could flow into our market from offshore as they buy those shares, and that’s based on the percentage of the SABMiller book that’s the register that’s held in South Africa by South Africans.

So there are some very interesting liquidity events that are coming up but I do think that to the extent that emerging markets remain a play for global investors, South Africa is going to remain a very interesting market.

I think that when you look at other emerging markets such as Brazil and Russia and others that have traditionally attracted flow, even China. South Africa, notwithstanding these issues, still looks relatively much better. That’s certainly the market information we’re getting from our large member firms and their clients.

RYK VAN NIEKERK: But both those countries you have mentioned have lost their investment grade ratings from the ratings agencies. We seem to be on the verge of a downgrade – are you worried about that?

DONNA OOSTHUYSE: I think there are a couple of things that are very important to note. Moody’s, as you know, was here recently and they held their rating (two notches above sub-investment grade). Standard & Poor’s has been here recently, analysing South Africa and I think a lot of anticipation around the sovereign risk rating of South Africa has been built into asset class prices, particularly around credit default swaps. But on the other hand I think it’s very important to think about the detail, the South African bonds are in the world global bond index…and that index is based not on sovereign bonds but based on local currency debt. South Africa’s local currency debt is several grades above sovereign investment grade.

So the concern that investors may have is that if South Africa gets to sub-investment grade would that trigger South Africa coming out of the world global bond index? The answer to that would be no, because the rating agencies are looking at the probability of default and at the moment it’s the international rating that they are looking at. So those investors…and we had at the time I think it was about R30 billion of inflows into South African bonds on the back of South Africa coming into the global bond index. A lot of those were new investors in South Africa, global bond tracking bonds that were tracking the WGBI (World Government Bond Index), a lot of that from the Far East, Japan and other countries. So I don’t think we would see a massive outflow on the bond market linked to WGBI; so that would be the first point because I don’t think the local currency risk rating is at risk of sub-investment grade.

RYK VAN NIEKERK: But we are seeing bond rates of about 9.5% in the local market, which seems like some negativity is priced in?

DONNA OOSTHUYSE: I completely agree and I think the risk premium, if you will, is going up – but that would be going up in the case of a downgrade whether it was to sub-investment grade or just downgrade. So I do agree that the risk premium is going up.

I think there is a view in the market as well that we are in a rising interest rate environment, whether or not the Fed continues to raise rates I think there is some concern around inflation in South Africa. We’re looking at most recent inflation rates of 7.3% – I believe was the last one that came out recently. So there is a bias that we are in a rising interest rate environment and then, in that environment, bond prices go down and yield goes up but I do think some of that, of course, is based on a risk premium as well.

I do think that on the sovereign side, the most important thing to think about is which investors globally would have mandate that might be compromised if South Africa was sub-investment grade. In other words if you’re a global fund manager are you operating with a mandate from a fund or collective investment scheme that says you can only invest in investment grade countries? To the extent that those mandates are out there we may see some capital flow out of the country if we do get downgraded.

RYK VAN NIEKERK: I just want to return to the JSE and the level of activity you see. The listing of AB InBev has been a massive listing for the JSE, but other listings have been few and far between, especially recently. What do you ascribe that to?

DONNA OOSTHUYSE: We’ve had six listings year to date and last year we had 23; the year before that was 24 and in 2014 it was the first year that we had over 20 listings since the global financial crisis. So there are a couple of things that I would say: a lot of the new listings that we’ve seen over the past two years have been linked to some innovations that we’ve made at the JSE, things like special purpose acquisition companies, fast track listings from overseas exchanges….

RYK VAN NIEKERK: REITs, yes.

DONNA OOSTHUYSE: …and real estate investment trusts (REITs), that’s exactly right. So this year we have seen some REIT listings. I was in London with one of our sponsors in January this year; there is enormous interest by other real estate investment trusts to list but a lot of the issuers are waiting to see some settling of the rand.

[On May 30, Bidvest unbundled its food business Bid Corp] and we have some other listings in the pipeline. But typically what we also see is a lot of the listings happen later in the year because once they’re approved there are a lot of governance activities that companies need to do in order to prepare the company to actually list. So we know we still have interest and we’re hoping that we will see more, but in the meantime a lot of what we have seen has been linked to those three. Real estate continues to be a very popular asset class in South Africa.

RYK VAN NIEKERK: Why do we not see more African companies or non-South African companies list on the JSE?

DONNA OOSTHUYSE: That’s one thing we’re working on very hard: we’re working with other exchanges across Africa on cross-listings; we’re working with other exchanges across Africa on exchange-traded funds.

You may recall last year we had a very successful listing of Choppies, which is a Botswana primary listed company that came to our market. They raised about R700 million. It was a very active order book: as that listing came up as we opened the market the order book was completely full. The share price got a very nice uplift on that day. Their purpose of listing here was to raise capital in South Africa, not just to expand the South African business but also to make acquisitions in other countries across Africa.

So we’ve been using that as an example to companies in the rest of Africa, in terms of how they can capitalise and optimise the deep and sophisticated capital markets we have in South Africa, to raise capital and invest in other countries. So it’s something that we’re working on.

I think if you look across the continent, aside from other companies that are already listed that are looking at secondary listings, there’s not a lot of growth and listings across those countries. A lot of that is because of the nature of the corporate sector. A lot of these are large family-owned businesses, subsidiaries of multi-national companies, many of which are South African by the way, and so forth.

RYK VAN NIEKERK: Just back to the political situation, Julius Malema marched to the JSE late last year and handed over a memorandum, and the message was clear that the JSE is seen as a symbol of white capital. What has the response of the JSE been?

DONNA OOSTHUYSE: We did reach out to all of our listed companies and communicated to them what we had heard, and I think it was very important for the JSE to be present to receive the communication from the EFF. We passed the tone of that and the content onto our major listed companies and I must be very honest with you, we’ve been very impressed by the corporate sector in South Africa and how they’ve leaned into some of the big issues that are facing our country. We’ve certainly seen that recently, with the efforts that have been made by minister Gordhan and President Zuma and the deputy president and others to reach out to the business sector to try to collaborate on initiatives that would a) bolster our argument against a downgrade but b) address some of these key structural issues that we have. So I think that there are actions underway.

We, of course, most recently announced our enterprise development programme for black brokers, where we’ll be giving cash back to them to be able to invest in their business and other companies are choosing avenues to pursue that are aligned to their business models.

We’ve also announced changes to our empowerment segment; we’ve had MTN list their empowerment scheme on the JSE; we’ve got Sasol that’s listed theirs, we have two more large companies that are listing their empowerment schemes on the JSE coming up in the next couple of months. So I can’t say that this is a political connotation but I do think that South Africans and certainly corporate leaders are leaning into the national agenda and what needs to be done, not just to solve the structural issues in our economy but also to help develop our capital markets and make sure there’s funding available to address the issues we need to address.

RYK VAN NIEKERK: One interesting business is EasyEquities that seems to democratise share investment. It’s a lot cheaper to buy shares via EasyEquities than a traditional broker. How do you see this business and the approach they are following?

DONNA OOSTHUYSE: One of the things I’ll say is we really would like to see more activity in our market by the retail sector. As you know, the activity on the JSE is heavily dominated by our large institutional investors, many of which manage funds on behalf of the retail sector. But the retail investors are investing passively, if you know what I mean.

So we would really like to see more activity by the retail sector and, of course, that needs to be linked with appropriate levels of financial education and literacy so that investors understand the opportunities of investing in exchange-traded products but also that they understand the risks involved with those. So I would say that is the first point and we were very active with National Treasury and the brokerage community in working on the tax-free savings accounts that were announced about a year and a half ago, and we’ve seen a nice pick-up in growth in those tax-free savings accounts.

But that being said, I think looking at EasyEquities is probably just an example of the kind of disruption and fragmentation that we’re going to start seeing in our market and this is typical of what’s happening in markets all over the world, where your very traditional players are finding new competitors that are being able to leverage technology to be able to reach and, to some extent, disintermediate the traditional players in the market. And to the extent that they have a good offering that is affordable, that also weighs into the issue of investors understanding the risks and opportunities of the market, then I think it’s a good development.

RYK VAN NIEKERK: Don’t you think it’s too expensive for a middle class individual to invest in the JSE? The rule of thumb is that you need at least an investment of R10 000 in one particular share to dilute the impact of the trading fee.

DONNA OOSTHUYSE: We’re really focused on that, as I mentioned, certainly on the tax-free savings account we have made some important contributions to the affordability of that, we’ve reduced the system accounting charge that we have by 66%, which is the BDA charges for the tax-free savings account and we’ve also reduced data fees to the brokerage community on those accounts as well. So I think we’ve certainly stepped up and in terms of the overall fees to the market it’s something that we’re very much attuned to in terms of the all-in cost to clients of trading and it will continue to weight very much on our minds as annually we look at our cost models and our pricing to the market.

RYK VAN NIEKERK: Just lastly, what are the key focus areas for the JSE at the moment?

DONNA OOSTHUYSE: I’d say first and foremost is really making sure that we are close to our constituents and that ranges from companies that are looking to list, companies that are already listed, the large institutional investors and the retail sector, that you just mentioned, and also the intermediaries, such as the large brokers, such as the small online brokers to make sure that we are aligned within the entire ecosystem, which is very well developed in South Africa and very well respected, to make sure that we’re aligned. And, as you mentioned, that we are pricing our products appropriately, that we’re innovating appropriately, that we are investing in good technology that will help them achieve their goals and that we are making sure that we’ve got the right balance between the commercial activity of the JSE, an important role we play in terms of market regulation and stability of our financial market.

RYK VAN NIEKERK: Thank you, Donna. That was Donna Oosthuyse, she is the director of capital markets at the JSE.

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