AS THE JSE marked 20 years since it completed its Big Bang deregulation process and closed its old trading floor, graphics published in this newspaper showed in numbers how much the shape of the equities market has changed over those two decades. The market capitalisation of the JSE is 16 times what it was in 1996, but the number of listed shares is down by more than a third. So there are far fewer stocks, but their average value is far greater. And their complexion is ever more international.
Of the 397 listed companies, 29% are dual-listed, up from just 6% 20 years ago, and 72 of them are foreign. Of the top 15 by market value, two-thirds are domiciled and have their primary listings elsewhere, with the list dominated by the likes of SABMiller, Anheuser-Busch InBev, British American Tobacco, Richemont and BHP Billiton, some of which have no South African exposure at all.
Even for those that do, SA is now a declining proportion of revenues — Prudential Investment Managers cited figures showing SA accounts for only 44% of the revenues of the companies in the JSE’s all share index.
As one of Prudential’s portfolio managers put it, if the EFF’s demand to the JSE that “all companies that have the majority of their business in SA should have their primary listing on the JSE, and their head offices in SA” were carried to its logical conclusion, we would probably see even more JSE-listed companies moving abroad.
All of this reflects the JSE’s success in updating its rules and systems over time to make sure the exchange has stayed robust and relevant, even as the centre of gravity of the equities market has shifted from SA.
More profoundly, however, that shift has reflected the drive by South African companies to internationalise, initially in the 1990s because they needed to diversify beyond a small market; more recently, because that market has very little to offer in the way of growth potential, quite apart from any political risks.
April numbers from the Organisation for Economic Co-operation and Development (OECD) show the outward-bound thrust in foreign direct investment (FDI) continued in 2015, when SA saw $5.3bn of outward FDI flows, but inward FDI plummeted to just $1.7bn ($5.7bn in 2014).
The OECD also measures FDI “positions” and in the case of SA Inc, as it were, we have a stock of $146bn of FDI abroad, against the $138bn inward stock. The trend is influenced by exchange rate moves, which boost the value of dollar assets held by South African companies abroad, while the value of FDI assets held by foreigners in SA has kept falling.
That’s not good news for an economy that sorely needs inward FDI, and the skills, capital and innovation it brings. Nor is it good news that South African companies see investment prospects everywhere, but at home.
But whether the trend to internationalise, at the level of companies or the JSE, is good or bad is a matter of perspective. For SA Inc, large holdings of hard currency assets act as a kind of rand hedge, enhancing the country’s balance sheet if the rand falls. They should also deliver dividends (and interest) flows, which come back to SA, and increase in value on a weaker rand.
That’s even more the case for institutional investors, such as pension funds, or individual savers, whose fortunes need not be tied only to those of the domestic market — which is just as well for them and their savings.
Emerging-market equity markets have generally underperformed those of developed markets in the past two to three years, SA’s included, and the JSE’s performance would have been significantly worse if not for its international flavour — and by corporate action in a couple of major companies. Bayhill Capital calculates, for example, that the JSE would have been in a bear market in the past year if SABMiller and Naspers were excluded. Prudential’s analysts reckon the JSE would have crashed worse than it did in December if not for the hedge provided by non-South African revenue and companies.
The international flavour of the JSE means pension funds, whose offshore exposure is capped at 25% (plus a further 5% in Africa), can have it both ways. They can invest on the JSE and gain foreign exposure for the pension fund members whose savings they look after, and they can obtain direct foreign exposure through the foreign allowance.
Regulators and economists have long wondered whether the pool of assets pension funds held outside SA act as a kind of rand hedge, because when the rand weakens and they go above their 25%, they have to rebalance back to the limit within 12 months. Interestingly, however, as exchange controls have been liberalised and the limit has been raised, multimanagers, such as Investment Solutions, report that pension funds have been less desperate to “park and leave” as much money as they can outside the country’s borders, and have started to shift funds back and forth within the limits in ways that will enhance their performance.
So the flows are not just one way. And there’s been significant upside to counter the downside from opening up SA’s markets, and its financial borders, in the past 20 years.
• Joffe is editor at large.