JSE error: Analysts knew something was wrong

On Sunday the JSE revealed that a “programming error” had caused its reporting on the inflows of foreign money into South African equities to be completely incorrect. Rather than more than R100 billion worth of net buying since May 31, the market had actually seen net foreign selling.

The JSE’s CEO Nicky Newton-King apologised for the error, but doubted whether it would have had a big impact on investment decisions. This appears to be true, not least because many analysts told Moneyweb that they had already come to the conclusion that the JSE’s numbers couldn’t be right.

Jann Krynauw, director and actuary at REZCO Asset Management, said that they were one of a number of companies that raised the issue with the JSE. This is because JSE reports were showing that there were almost no sellers of any local shares, which simply wasn’t plausible.

“Some, but not all, of the larger brokers we deal with also questioned the numbers,” he said. “On a common sense basis, the numbers had to be wrong.”

Doug Blatch, the global head of dealing at Investec Asset Management voiced similar sentiments.

“The desk questioned the JSE information that we were getting via the brokers and raised this in our morning meetings with the investment team, as we just didn’t believe the numbers,” he said.

Head of MacroSolutions at the Old Mutual Investment Group, Peter Brooke, noted that the banks at least would have known that the numbers couldn’t be accurate.

“If you’re a bank you should have insight into the number of actual transactions taking place,” he said. “If you are being told that foreigners are huge buyers but you aren’t getting any orders and you know your competitors aren’t getting orders, you should be able to work out that something is wrong.”

Brooke added that the figures in question are not ones that he and his team would use for decision-making purposes anyway.

“The quality of those numbers has always been a bit dubious because day-to-day flow can be heavily influenced by the banks,” he said. “You also have dual-listed activity, so it’s not something we would actively use.”

The deputy head of equities at Nedbank Corporate and Investment Banking, Barry Hawke, said that the overall impact on the equity market “should be insignificant”.

“The key implication of this announcement from the JSE is sentiment,” he said. “This information would be used anecdotally by asset managers and traders to influence some of their short-term trading and pricing decisions.”

Amelia Morgenrood of PSG Wealth pointed out that the idea that foreigners were such heavy buyers of South African equities had created a positive feeling toward the market.

“It created a lot of confidence in the stock market, particularly with Wall Street reaching new highs last week,” she said. “I had one or two clients who wanted to sell shares because of the political turmoil in the world, but I convinced them to stay invested by showing them that even foreigners are record buyers of South African stocks. That suggested that there is nothing wrong with our stock market and our prospects are good.”

Economist at Macquarie Group, Elna Moolman, however said that the record numbers the JSE was reporting had not yet influenced any of their forecasts. She added that the revised figures actually eased some of their concerns about the impact this would have down the line when these same foreigners received their dividends.

“We were worried that it may be a headwind to the current account improvement that we expect as the very elevated level of foreigners’ equity holdings would then have placed upward pressure on dividend payments,” Moolman explained.

Brooke agreed that there was actually good news in the correction.

“The reason being that if we had had that level of inflows, the foreigners would all be in,” he said. “They couldn’t carry on buying at that rate, which means it only created potential for selling. Now that we are starting to see emerging markets outperforming and emerging market currencies are stronger, the fact that foreigners haven’t bought South Africa is good news because it means that there is potential buying pressure to come.”

As to what had been lifting the local currency if not inflows into the local equity market, Old Mutual Investment Group economist Rian le Roux said that it’s impossible to really pin down exactly what moves the rand.

“One never knows, simply because the forex market turnover is huge and the sources of flows are pretty much impossible to try to explain at any given point in time,” he said. “However, the firming of the rand is at least partly due to generally improved sentiment towards emerging markets after the Brexit decision, on account of a growing view that Brexit will likely imply that global central banks will now err on the side of maintaining their super-easy policies for even longer, triggering a renewed wave of yield-search in emerging markets.”

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