ON THE MONEY: Exchange weathers lean times in spite of domestic downward drift

In an economy only just holding its head above recession, the JSE is doing remarkably well. This year the all share index has generally kept above the 50,000 points line, about 80% up on four years ago. Yet expectations for gross domestic product growth continue to drift downwards, and might not even make 1.4% this year. How can this disconnect be explained?

It’s simple: the JSE has increasingly little exposure to the domestic economy. Thank goodness. Consider that of the 10 largest companies on the JSE, only two; FirstRand and Sasol, have most of their operations in SA. The JSE’s foreign bias is set to become more entrenched. A new behemoth is set to join its ranks when Anheuser-Busch InBev (AB AB InBev) obtains a secondary listing, sporting a market capitalisation of almost R3-trillion. This dwarfs the R1.4-trillion of SABMiller, with which it intends to merge next year.

They will be far larger than second-placed British American Tobacco, trading at R1.7-trillion, Naspers (R900bn), Richemont (R561bn) and BHP Billiton (R367bn). The Top 40 index is worth R9.7-trillion. So the AB InBev’s arrival will make a big difference. I suspect this is causing a headache in Pretoria.

The Treasury has been worried about foreign companies accounting for too much of the JSE’s Top 40 index. So, in 2011 when revising its rules on which companies count as foreign, it declared that in the case of British American Tobacco, only its South African share register could be included in the index.

This was ludicrously arbitrary. Other firms, such as Naspers, 90% of the value of which is accounted for by its interest in Chinese internet company Tencent, are not treated this way.

The purpose of an index is for investors to track average performance. Investors can easily see through what the Treasury is doing. Anyway, the Swix 40 index has become a much more popular reference and weights companies by their South African share registers only. I look forward to seeing what the Treasury does with AB InBev. Will it force the Top 40 index to add another distortion to its measurements or use the opportunity to abandon the silly different treatment of British American Tobacco? And what will happen when the merger with SABMiller actually goes ahead? Will AB InBev go back to being weighted?

The merger of AB InBev and SABMiller will be a momentous occasion. Castle Breweries was founded in 1895 in Johannesburg, nine years after gold was discovered. Two years later, it became the first industrial firm to list on the JSE, then a decade old. It bought up competitors in SA before being trapped by apartheid from international expansion. Unlike other monopolists, SAB did not become fat and lazy, instead developing one of the world’s most efficient supply chains.

When apartheid fell, it had a big cash pile to use to go on an international shopping trip and efficient business processes to add value to its new acquisitions. Today Africa as a whole accounts for just a third of its revenue.

AB InBev is going to lengths in its merger planning to emphasise the esteem it holds for SABMiller’s management — probably not just talk.

The SABMiller talent pool is one of its best assets and AB InBev will have identified individuals it wants to retain and deploy. It believes it will get $1.4bn per year of cost synergies out of the transaction, more than 10% of SABMiller’s current cost base. It is more than just silly national pride to suggest much of those costs will be found in AB InBev’s business rather than SABMiller’s. Such is SABMiller’s reputation for efficiency.

For local investors, the JSE will become more of a conduit of capital to the rest of the world than an exposure to the domestic economy. That is a mathematical triviality because our growth rate of 1.4% is below the world average, which the International Monetary Fund thinks will be 3.3% this year. It’s worse when the weakening rand is factored in, which means our economy is shrinking in dollar terms, so our companies’ international operations will continue to grow faster than domestic ones. Perhaps this trend will one day reverse and we will again see SA growing ahead of the world average. If only.



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