REBUILDING THE JSE
Stock exchange boss Leila Fourie has a mountain to climb — not only is the Covid-19 pandemic ravaging local companies, but the number of listings has been falling for some time. While acknowledging the scale of the challenge, Fourie is focusing on meeting it one step at a time and she is seeing a number of positives
The head of the world’s 19th-largest stock exchange appears to be happiest clinging to a sheer rock face, waves crashing far beneath her, or floating, suspended by a single rope, from the soaring Wolfberg Arch in the Cape’s otherworldly Cederberg.
Avid mountaineer Leila Fourie moved back from Australia to SA a year ago to head the JSE after a three-year stint as CEO of the Australian Payments Network. Back then, there was no hint that a deadly virus would soon rip its way through the world.
Asked if she regrets the move back to a country in crisis, Fourie is adamant she doesn’t. “It wasn’t part of my plan,” she says, “but I thought: ‘I’m now 52, if I get to 70, I don’t want to look back and wonder how my life would have turned out had I not taken up this opportunity.’”
She was “fully aware” of SA’S challenges before taking the job, but she attributes her resolve to the rigours of mountain climbing. “That’s kind of given me a physical strength and a mental and emotional resilience, and I probably wouldn’t have moved continents and accepted the role if the job didn’t present me with a challenge.”
While SA has not yet posted the same awful death tally from Covid-19 as the US or Europe — at last count, at the time of going to press, we had 23,615 confirmed cases and 481 deaths — the pandemic has devastated an already frail economy.
Hundreds of businesses have gone to the wall, including Jse-listed companies of long standing, such as Comair and Phumelela. If they fold, or are bought out at bargain prices, it will increase the flood of delistings that began roughly three years ago.
In theory, the stock exchange should be where companies go to raise capital. But in SA, the corporate marketplace has been tarnished by a raft of scandals and flagging investor spirits, in large part thanks to a decade of economic stagnation.
That’s clear from the kind of returns on local listings: even with a huge recovery in May, after the March sell-off, the JSE’S mid-cap index — which arguably tracks Sa-focused shares — is down 31% over five years. Over that period, the wider JSE has fallen 7.3% — which would be a heap worse were it not for Naspers, which gained 264%.
And that was before Covid-19, which is expected to cause SA’S GDP to fall anything between 4.5% and 16.5% this year. As the platform for corporate SA, the JSE is unlikely to pass unscathed.
Opportunity in crisis
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Fourie has had a tougher lockdown than most, as her family has remained in Australia. Their contact for the foreseeable future is the tool now commonplace for remote workers everywhere: Zoom.
But, she says, “I’ve had the opportunity to lead through the crisis and make a contribution that I think is a bit bigger than myself, and that I would not have made had I been in a general role as I was in Australia. I’ve probably learnt more in the past two months than in my 30-year career ... it doesn’t have to be the grimmest period, but it’s definitely the toughest.”
Given the rate of company closures, will the JSE still have anything of substance to offer investors in, say, five to 10 years’ time? And key to that: can Fourie arrest the tide of delistings?
By November last year, when the FM wrote of this burgeoning crisis, 21 companies had opted to delist that year. Today, there are just 351 companies listed, compared with 668 in 1999.
Perhaps counterintuitively, she sees this
as a time of opportunity for the 133-year-old exchange.
“There is obviously a huge rebuild that is required in the country, but in order to rebuild you need capital, and so we need more channels for capital formation rather than less,” she says.
If you don’t have a channel for equity capital, “the economy won’t be rebuilt because you can’t build an economy on debt, otherwise it will look like an SOE”.
The real question, she argues, is whether SA Inc can survive, post-covid, without the JSE.
“Anybody who has any binary and confident views should be cautious, because I don’t think the investor impact is responding in a normal way … there are mechanisms in place this time around that perhaps weren’t there in the Great Depression.”
In particular, she cites the speed with which governments have responded to the crisis with fiscal and monetary stimulus, including SA’S R500bn bailout.
Fourie says the way companies have worked to support each other is “unique and quite refreshing and so I am hopeful that if we come out of lockdown sooner rather than later, we’ll see a recovery. But there will be shrapnel.”
Her war allegory is apt: the JSE has, after all, lived through the SA War, two world wars and apartheid …
It’s instructive to consider what happened after the 2008 financial crisis which, at a point, may have seemed like Armageddon for stock markets. During a six-month period between May and November that year, the JSE shed 45.5%. It hit a low of 18,152 points in March 2009.
But it recovered within a few years, 20 15 10 5 0 -5
SA GDP growth (y/y)
Source: Bloomberg, JSE
peaking at 61,623 points in January 2018. Even amid Covid, the JSE’S all share index sits at around 50,500 points today.
Says Fourie: “There’ll certainly be losers, and winners, and there’ll be new businesses built on new foundations. In 10 years from now, the top 40 will probably look very different ... but the basic ethos remains the same: a need for capital formation underpinned by transparency and efficiency.”
The real bedrock for the JSE is the institutional investors, like Old Mutual, Allan Gray, Ninety One and Coronation, which are the stewards of SA’S pension funds. As much as 75% of all pension assets remain onshore, largely managed by them.
That fact alone, says Fourie, is an “enormous protective mechanism” for liquidity.
“If we were to take the virus and view it as a giant international sanctions period, like we lived through in the apartheid era, companies changed hands, but things didn’t fall apart and local investors took up the slack.
We’ve seen that time and time again, through every downturn.”
It has helped that the JSE is one of the most internationalised exchanges in the world. Thanks to heavyweight dual-listed stocks such as British American Tobacco, Richemont, AB Inbev and Naspers/prosus, it has multinational heft.
“If we look just at Prosus, they won’t be moving offshore because they’d require regulatory approval … their [share price] was up 41% year to date, so they are providing a great opportunity for locals to grow their investments.”
In fact, about 70% of the exchange’s top 40 companies derive their income from offshore revenue sources. That has proved a lifesaving buffer against the rand, which has weakened 22% this year to R17.42 against the dollar — a dramatic fall from a decade ago, when it was R7.60.
When the rand deteriorates, companies with dual listings make money and, crucially, so do their shareholders.
This, says Fourie, “makes the market much more resilient and improves ... the investment of individuals”.
But if you strip out the dual-listed stocks, it suggests the SA Inc stocks, which rely solely on the domestic economy, are in deep trouble.
So is there anything that the JSE can do now to help out its smaller players?
As it turns out, it has already introduced some measures to help small- and mid-cap companies through Covid-19.
For example, if any shares on the Altx
(the exchange for smaller companies) want a secondary capital raise, the JSE is giving a 25% discount on the cost of listing or raising capital. And in trying to attract more trade in unloved small caps, the JSE is halving trading, clearing and back-office fees for shares in the BEE, mid-cap and Altx sectors.
(at May 7)
The idea, says Fourie, “is to try to encourage liquidity and eyeballs and interest in these stocks. And we’re offering extended payment terms, so three or six months for those companies that might be financially distressed as a result of Covid.”
But is this enough? Isn’t it just tinkering around the edges of the real issue: investor reluctance to take a punt on SA Inc?
It’s a conundrum felt acutely by the CEO of one unloved small cap: Purple Group’s Charles Savage.
Purple owns fast-growing online brokerage Easyequities, which introduced the concept of fractional share investment in SA. It has arguably done more than any other local financial services firm to “democratise” SA’S stock market.
The problem is that Purple’s share price has languished in penny-stock territory for years, despite the growth of its most public asset, Easyequities.
Says Savage: “It’s difficult for me too. Because we’re a small cap, where do we go to raise capital? We go to the private market — we don’t go to the exchange because there isn’t a marketplace to raise capital for small businesses.”
Stefano Marani, CEO of gas exploration group Renergen, is on a mission to change this. Renergen owns the only onshore petroleum production rights in SA — a potentially lucrative gas deposit near Virginia, in the Free State. It listed on the JSE’S Altx in 2015 and the Australian Stock exchange last year.
Marani admits he’s frustrated by the indifference shown to the local market’s small- and mid-cap stocks — by investors and regulators alike. I have been banging on the drum for the better part of a year to try to stimulate the small-cap market,” he says. “It is the easiest way for this country to get significant economic growth without having to make huge policy changes.”
As he explains: “If you put R1m into a small cap, you’ll create more jobs than by putting R1m into a top 40 share. You create more jobs, the company pays more tax, there’s more for the fiscus and a lot more growth for pension funds.”
But it was Renergen’s experience in Australia that really got Marani fired up. Under Australia’s reforms in the early 1990s, every salaried employee was forced to put 10% of their income into a pension fund. The trick was that savers could get onto a platform to trade their own pension. That, argues
Marani, sparked a huge surge in appetite for small and penny stocks from retail investors.
“I don’t think the outcome that resulted from laws they implemented in 1992 was planned, but the outcome was impressive,” he tells the FM.
Back then, he says, the Australian Stock Exchange (ASX) looked much like the JSE
Mar 9: does now, with its top 100 companies dominating the market cap of the exchange.
But today, 84% of the ASX’S market value sits with companies valued at less than
R5bn. Says Marani: “You can list a company with a market cap of A$1m and it’s still worth your while. There’s a lot more hunger for interesting stories.”
Those measures, taken 30 years ago, have aided Australia’s remarkable record: since 1992, it has not had a recession.
Now Marani is pushing a new scheme to promote investment into companies worth less than R2bn: a unit trust that is exempt from any capital gains tax. He argues that what the fiscus loses in capital gains tax would be “dwarfed” by what it would gain from growing businesses.
Small stocks also need a champion in the many independent financial advisers. The problem is, these advisers typically direct their clients’ funds into a handful of shares — or, at least, the JSE’S top 40 stocks — instead.
This isn’t a new phenomenon. Aeon Investment portfolio manager Asief Mohamed says small- and mid-cap shares have been “shunned” by institutional investors for a long time.
Marani is contemptuous of SA asset managers who aren’t willing to invest in the sector, preferring to chase the same 100 shares everybody else is buying.
But, he argues, if there were a vehicle for advisers to direct pension and discretionary money into small-cap stocks, you would create or encourage more listings.
Of course, the JSE isn’t the regulator. But Marani hopes Fourie will take his suggestions to the legislators. “It needs someone
like Leila, who has the ear of government,” he says.
But in the absence of such an intervention, is it too pessimistic to suggest, like uber-bear Magnus Heystek, that the SA market is finished and that investors should take every available cent offshore?
“I think that talks as much to the [credit ratings] downgrade as it does to the current Covid crisis,” says Fourie. “Ironically, as much as Australia — and I love Australians and I love Australia — might be high-fiving on the Covid crisis, their economy is deeply connected to China. And so if China does take longer to come out of the crisis than expected, they may well be in a position as difficult [as SA].”
It’s a fair point — but the comparison with the Australian market isn’t flattering to SA. While SA’S locally focused companies have had the stuffing knocked out of them, Australia has just raised a record amount of fresh equity on its stock market from willing buyers.
According to the Financial Times (FT), companies listed on the ASX raised $8.9bn in April — “the biggest monthly total since the crisis period of 2009 and a sum that rivals the $11.1bn raised in the US — a market 28 times [its size],” the paper reported.
John Mclean, head of capital markets origination for Australia and New Zealand at Citi, said many companies are “looking to raise funds for growth purposes”.
Covid aside, the JSE’S biggest existential threat is probably the rise of private equity — funds and investors preferring to buy companies or assets directly, rather than through a stock exchange.
Fourie says that to address this, the JSE is investigating the creation of its own private placement market, in SA and Africa. The says Fourie, “is that there would be standardised requirements, but less onerous requirements on disclosure [and] access to liquidity”.
One of the biggest issues for start-up firms is that they may only have five funders to begin with, and if one of them wants to cash out, they are difficult to replace. The JSE’S idea is to create “a meeting place ... a platform in which investors and start-ups could interact”, says Fourie.
It’s a smart move: ward off the threat of private equity by getting into the game yourself. Clearly, the JSE has to do something. The existential challenge to stock exchanges worldwide, not just in SA, is growing.
Take Silicon Valley start-up, Carta. According to the FT, Carta “plans to launch a private share-trading platform that it hopes will be a credible alternative to leading stock exchanges as fast-growing tech companies increasingly decide against initial public offerings.”
If it pulls it off, CEO Henry Ward says, there won’t be an NYSE or Nasdaq in 10 years’ time.
Carta aims to solve the main dilemma facing private equity — one that has ensured the listed market remains firmly entrenched with investors — an easy ability to cash out.
“In the current world, you can either be private and illiquid or you can be public and liquid. Carta is going to help companies be private and liquid,” Ward tells the FT.
Does that sends a shiver down
“It doesn’t really,” she replies, “and the reason for that is that the US market is very different to SA. They have in excess of 15 exchanges and in excess of 50 marketplaces where you can trade, so that market is very fragmented.”
Mohamed believes the growth in private equity players is hardly surprising.
“Asset managers are too focused on short-term profits,” he says. In contrast, private equity is better suited to “patient capital that can stomach losses for a couple of years” to grow a business in the longer term.
“Maybe we should just accept that there will be a lot more private equity players,” he says.
As a fintech “disrupter”, Savage is aware of the potential for change in the stock market. But he doesn’t see the JSE as being under immediate threat.
“The most likely scenario for me is that the listed investment classes remain the most popular, specifically because listings are an indicator of quality or due diligence ... For investors, institutional as well as retail, it’s a quality assurance.”
But if fintechs such as digital platforms “gain trust faster than we expect”, which isn’t unlikely, then exchanges should brace for major disruption.
Says Savage: “It’s probably been the thing that’s surprised me the most — how quickly we created a credible brand. If little Easyequities can create that kind of trust in a five-year period, what happens if Apple, or Google or Alibaba or Amazon, decide they are going to be the trusted source for investable opportunities, for listings?”
If exchanges wish to retain their position as the primary place to raise capital, he says, “they are going to have to do more in the retail space than they’ve had to before”.
So, not only does Fourie have an economy in freefall to navigate, but a long-term change to how money is raised by companies. And you get the sense this excites her.
“South Africans tend to be very negative and we tend towards catastrophe thinking,” she says. “I think this crisis has created the catalyst for policy and economic reform in the government, which forces it to focus on Gdp-growth initiatives and genuine jobidea,