Strong bond market inflow boosts JSE
Bourse CEO has plans to capitalise on aboutturn in investor mood
● The violence and looting that erupted in parts of SA last month will hit GDP this year, but the JSE has largely shrugged off these events, with its bond market in particular experiencing strong foreign inflows that signal international investors are optimistic about the country’s long-term prospects.
Leila Fourie, CEO of JSE Ltd, the company that operates Africa’s largest stock exchange, said this “typically signals a level of confidence in government and a level of certainty in policy” on the part of investors, which is good news for SA as it “represents a turnaround in investor sentiment”.
“I would suggest the bond market inflows are a function of a couple of things. Firstly, a risk-on sentiment towards South Africa as it offers a strong yield relative to other emerging markets. Our 10year government bond is offering a yield of 9.3% right now. Also there is a search for yield particularly by the developed world economies, where interest rates are very low,” she said in an interview after the release of the JSE’s results for the six months ended June 30 2021.
Fourie said the government had also announced some “promising policy” reform, which is supporting the bond market’s resurgence. This includes allowing private companies to generate up to 100MW of electricity, as well as changes at state-owned enterprises such as South African Airways, where a private consortium, Takatso, has been announced as the airline’s preferred strategic equity partner.
There has also been “some strident reform” to address corruption, said Fourie. “This is clearly encouraging inbound confidence and this is translating into increased investment into the bond market.”
So far this year there have been positive inflows to the bond market of R34.7bn, compared with outflows of R66bn last year this time when SA was in the full grip of the Covid-19 crisis and hard lockdown, and been downgraded to sub-investment status.
And the JSE, which is on a drive to attract more inward listings from companies in Southeast Asia in particular, as well as encourage more investment in general on the JSE from this market, has not had any negative feedback from this region in the wake of the violence in Gauteng and KwaZulu-Natal.
The JSE’s equities market has seen investor outflows of about R68bn year to date — in line with outflows of R63bn last year — which represents a “structural shift down” in line with SA’s weak economic growth rather than movement due to the unrest.
Overall share prices of the companies on the stock exchange were affected on a far more limited basis by the looting, with a relatively quick bounce-back after the violence that occurred in the week ending July 16.
The JSE all share is now up more than 15% year to date.
“The forward-looking nature of stock prices suggests that if you have a once-off event it’s quickly diluted by the long tail of cash flows that drive the valuation. So typically when the market believes there is a low likelihood of an event repeating, there is a limited impact on share prices,” said Fourie.
She said this bounce-back has been seen in other markets where there are once-off crises, for example in 1963, the year US president John F Kennedy was assassinated, the S&P 500 increased 20%.
As far as the group’s interim results were concerned, the JSE reported a 6% fall in revenue to R1.24bn, and its headline earnings a share decreased by 26%, to 420.1c. It said its performance was affected by, among other things, “lower revenue in the equity and bond markets compared with a high revenue base in the comparative period, which stemmed from elevated volatility and trading activity driven by the Covid-19 outbreak”.
A stronger rand to the dollar during the period also affected “information services revenue and other income from foreign exchange cash holdings year on year”.
The JSE, which has about 329 listings compared with 811 in May 1999, also reported that during the six months to June, 15 companies delisted from the main board, compared with 13 during the same period last year, but said this “resulted from corporate actions and schemes of arrangement in mostly small to mid-sized, illiquid counters”.
Nevertheless the JSE is optimistic about plans to attract listings, as well as more trading from investors in countries in Southeast Asia over the medium to long term.
“It’s something that does take time to build. We’ve had a good response to initial conferences we’ve had [with parties in Southeast Asia],” said Fourie.
“As soon as Covid regulations allow we would really like to get boots on the ground and would like to go and present ourselves in person.
“We hosted a very successful South Africa Inc [virtual] road show, which President Cyril Ramaphosa headlined in June. We had a very good response from that. We are tackling this from all angles.”
Vestact portfolio manager Michael Treherne said the challenge for the JSE in trying to replace the companies that are leaving the bourse is that SA itself does not have a “startup culture” like the US, where the venture capital market is a strong source of new listings. He said this is no fault of the JSE but the end result is that larger companies on the main board continue to grow while the smaller stocks delist as there is “just not enough liquidity in them”.
However, he said there is scope for the JSE to make it more attractive for smaller companies to list on the main board by making it cheaper to do so.
The bourse’s secondary market, AltX, which has less onerous listing requirements, is another avenue that could potentially drive new listings.
Fourie said the fact that the value of AltX, which has 36 companies listed on it, has increased more than 25% year to date “signalled there was an improved investment stance” towards smaller stocks and that the JSE is also working hard in the venture capital space to try to encourage more listings.
“We have launched an SME accelerator, which is a programme designed to support and assist SMEs, and we will be launching a private market placement [platform] which allows SMEs to access capital.
“We are building out an ecosystem in the SME space as we see the SME space as a critical growth node in the country, and in particular in building it back after both the unrest and the pandemic.”
When Covid allows, ‘we want boots on the ground in Southeast Asia’