As financial crises go, the Johannesburg Stock Exchange (JSE), Africa’s biggest bourse and one of the world’s top ten exchanges, had a pretty good one. Michael Dynes reports
After the great fall of 2008, which saw share values plummet to record lows in March 2009, recovery took hold and began to gain momentum. Within six months, and despite the toughest market conditions in living memory, the JSE All Share Index had bounced back 50 percent by November, and has since continued on its upward trajectory.
The value of equities traded on the 123 year-old exchange in the year to March had risen six percent to more than R283.9bn ($38.59bn), a record that confirms earlier indications that foreign investors were returning in ever larger numbers. Foreign investors have been net buyers of South Africa equities, accounting for R75bn in inflows for the year. Russell Loubser, JSE CEO, characterised the performance as “resilient despite tough trading conditions”.
As global markets continue to recover, however, and the threat of a double dip recedes, the outlook for 2010 is better than anyone could have dreamed of twelve months ago. There are now clear indications that portfolio flows into Africa as a whole are drifting upwards, and expectations are mounting that this will trigger a renewed and sustained interest in African listed securities.
African project finance deals pulled in considerably in excess of $12bn in 2009, and there is confidence in project finance circles that 2010 could be a very good year – possibly even exceeding the all-time record of $18.4bn in 2007. The IMF and World Bank, along with other development finance institutions, have ramped up support for African economies, while private equity investors are increasingly seeing Africa as a new source of growth.
The South African rand (ZAR) is widely seen as a commodity bellwether currency. An appreciating rand is an indication that global risk appetite is buoyant. By the beginning of April, the currency had rallied 30 percent since January 2009, and the JSE reported that South Africa had attracted R130bn in net purchases of its stocks and bonds over the same period. Can it last?
Everything, obviously, depends on what happens to the global economy, and while economists invariably haggle over the finer points of recovery, there appears to be a growing consensus that the recovery is likely to be sustained – if somewhat patchy – but unlikely to be knocked off course by a seemingly endless series of mini panics that have followed the Lehman Brothers collapse – from Greek debt to Goldman Sachs fraud and Icelandic volcanoes.
In South Africa growth is forecast to be within a three to 3.5 percent range for the next few years. In Africa, the prospects look somewhat better at between four and five percent in 2010, rising to six and seven percent in 2011. The outlook for China and the rest of Asia is considerably more robust, which should help to compensate for the flat performance in more developed economies – especially Europe and Japan.
The next decade could indeed be a prosperous one, although not on the scale experienced in the heady years of the 1990s and most of the new millennium’s first decade. Little wonder, then, that Loubser is positioning the JSE to capitalise on African economic growth prospects in the years ahead.
The JSE’s Africa strategy aims, over the medium to long-term, to promote the development and growth of African capital markets, while at the same time positioning itself as the gateway for global investors seeking access to investment opportunities throughout the African continent as its own economic development gathers momentum.
Alongside the JSE’s Mainboard, where most of the exchange’s 400 companies with a collective market capitalisation of around $182bn are listed, and the AltX, the more turbulent listing for small and mid-cap companies, Johannesburg now has a new Africa Board, launched in the early part of 2009. Admittedly, there are, as yet, only two listings – Trustco and Wilderness Safaris – but talks are underway with others and more listings are expected to follow later this year.
The Africa Board is designed to create a platform for top African companies to list on their home exchanges – there are now 23 domestic stock exchanges across Africa including two regional ones – while at the same time dual listing on the JSE. The objective is to build a continental hub and spoke system of connections between Africa’s increasing number of electronic bourses, capable of routing buy and sell orders and data between African exchanges, and thereby developing new business and markets.
The JSE’s African strategy is not without its critics. Johannesburg sees itself as the hub, and other potential participants in Nigeria, Kenya, Namibia, Ghana, Botswana and the like, as the spokes. Most countries north of the Limpopo are already wary of South Africa’s industrial might and financial sophistication, and are hesitant about those advantages being further reinforced. All would like to turn the JSE’s hub and spoke strategy on its head.
At the same time, most are sufficiently realistic to appreciate that countries such as Tanzania, Uganda, Zimbabwe or even Nigeria will never rival Johannesburg, and the advantages of linking up with the JSE far outweigh the damage done to national pride and vanity by bowing to the inevitable. Moreover, the JSE’s African strategy is still in its formative stages. If it can help attract global investors and bring in fresh capital flows to finance Africa’s economic development, then the price would be well worth paying.
In addition to its long-term aspirations to be a driver of African economic growth, the JSE also harbours more immediate ambitions to become a global centre of mining finance. Mick Davies, Xstrata CEO, who has transformed the London-listed company which had a market value of $500m eight years ago in to a $50bn globally diversified miner today, told Johannesburg’s Wits Business School in April that South Africa was confronting its biggest commercial opportunity since the discovery of diamonds and gold in the late nineteenth century.
Davies insists that the commodities supercycle, which saw prices for oil, copper and other key commodities hit historic peaks in the middle of 2008 prior to the onset of the financial crisis, is still with us – it’s just hidden from view. He is adamant that the most significant feature of the mining industry’s downturn has been the extent to which demand has not been diluted. Moreover, he maintains, the results of constrained supply and strong demand are set to reassert themselves.
Continued urbanisation and industrialisation in developing countries lay behind the rapid recovery in base metals, such as copper which fell to $2,800 a tonne in January 2009 but which was back above $8,000 a tonne by March 2010. Against this background, Davies says, the eyes of the world are turning to Africa’s prodigious mineral resources, including the vast untapped wealth of the Democratic Republic of Congo, which will need to be developed in order to satisfy global demand.
This, says Davies, creates a fantastic opportunity for South Africa to become the centre of finance for African mining developments, providing that the two key obstacles – legal and regulatory – currently inhibiting the emergence of that role can be removed. The first is that foreign inward listings do not enjoy full indexation on the JSE. The second is South African exchange controls.
At present, foreign companies are encouraged to list on the JSE. But unless they are classified as domestic companies, their shares are not indexed, and therefore not fully tradable. Anglo American, BHP Billiton, and SA Breweries, for example, all have dual listings, and are classified as South African companies, so their shares are indexed and fully tradable. All had to obtain prior approval from the South African Treasury and the South African Reserve Bank in order to do so. That permission is given on a case-by-case basis. It is not automatic. But there is little point in a company listing on the JSE unless its shares are fully tradable. Consequently, few bother.
The other restriction is exchange controls. While capital controls have been greatly relaxed since the advent of black majority rule in 1994, they continue to exist. But without the free flow of capital, both in and out of the country, investors will never be fully confident that they can exit whenever they choose.
Davies wants to see both these restrictions removed, and Loubser is one of his biggest cheer leaders. The government in Pretoria, however, fears that abolition of the listings restriction would enable South African citizens to externalise their assets. Abolition of exchange controls would remove one of the few obstacles that prevented South African banks and other investors from exposing themselves to exotic products like subprime mortgages, which brought the western banking system to its knees.
Amidst all this complexity, a few things are certain. Africa will grow, South Africa will play a pivotal part in that growth, and few are positioned to benefit more from that growth than the JSE. The abolition of listing restrictions and exchange controls will probably speed up the process. But the end result will be the same.