How to staunch the foreign JSE exodus
Offshore investors will return if fraudsters are convicted and SOEs fixed, says bourse s Valdene Reddy
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aldene Reddy, director of capital markets at the JSE, says improvements in governance and transparency in key sectors, along with speedy prosecutions for white-collar crime, are “essential” to win the trust of foreign investors who are rapidly offloading local equities.
Non-South African investors sold a net R103bn of equities in the first 10 months of 2023, compared with R73bn in the first 10 months of 2022 — a 40% surge.
“If we could see governance, transparency and execution gusto brought to reforms in state-owned enterprises [SOEs] dealing with energy, transport and water, that would go a long way to instil investor confidence,” says Reddy.
So far this year the JSE has been among the worst-performing bourses among emerging markets — Anchor Capital reports it was the only major emerging-market bourse to record a decline in February.
“We’re sitting deeply discounted at the moment, and I don’t know that it’s the worst performing emerging market,” Reddy says.
“You’ve got 6%-8% top line growth in India. Their market right now is trading much higher and much more bullishly, whereas South Africa is trading at a deep discount.”
Trading volumes have shown very little growth over the last few years, a listings bloodbath saw the number of JSE-listed companies go from more than 600 in 2000 to 287 in 2023 and investors have been steadily moving their money offshore.
“We’re deeply correlated to the commodities cycle, which gave us some cushioning at a macro as well as a market level through the 2020/2021 period, and we’ve seen a contraction in the commodities market outside of gold.
“We’re definitely lacking relative to some of the majors but I don’t know we’re the worst emerging market,” Reddy says.
The MSCI South Africa value index is down 12.1% this year, while Turkey has a year-to-date gain of 13.1%.
“Turkey’s on a growth trajectory now but it was uninvestable 24 months ago. South Africa has never been uninvestable. That’ sa very big difference,” says Reddy, who has a BSc in actuarial science. She joined the JSE as head of equities and equity derivatives in 2015 and became director of capital markets in 2020.
In spite of seemingly contrary evidence she’s bullish about the country as an investment destination. But why would investors believe this is a market they’d want to put their money into, given the problems with SOEs and lack of liquidity?
“Even though we’ve seen thin volumes, especially this year to date, in general South Africa has good liquidity,” Reddy says.
This has been seen through the pandemic, the Russia-Ukraine crisis and other geopolitical volatility. “We have a deep, liquid market; this is why investors would come. Because right now we offer a lot of value, and investors are underweight South Africa.”
Foreigners have had a “sell bias” over the past three to five years that she ascribes to macroeconomic issues in South Africa but also global factors.
“You had India that was flexing, China coming with major indices on scale. Also, local asset managers took money out of local equities and bonds into foreign assets.”
But the equities market is trading at substantial discounts, so people are seeing “appealing” value unlock in South Africa and investor interest in the local market is resuming, she says.
“Some of our stocks are trading at between 20% and 40% discount, so that’s pretty cheap. And it’s not like you have a market where your blue chips are going to fail or falter.”
Notwithstanding “a few isolated incidents” such as Steinhoff, she quickly adds, which do South Africa’s investment case no good at all.
“It’s not good for the market when investor assets get depleted or lost. It has an impact on investor confidence.” Especially when there are no consequences.
To maintain the trust of foreign investors it is “essential” that corporate, public sector and government criminals be swiftly prosecuted, she says. “Prosecutions across the board would be a good testament to our credibility as an investment destination.”
Two years ago JSE CEO Leila Fourie said net inbound flows from foreigners in the first quarter of 2022 signalled a turnaround in sentiment. Could Reddy’s optimism about the local market be similarly premature given the huge outflows since then?
“It’s been a global shift, not just out of South Africa. So it’s not rose-tinted glasses; the opportunities are here. Second, South Africa has had its challenges. In the last 24 months we’ve had the electricity issue, the Financial Action Task Force greylisting. These are things you can’t just ignore.
“I won’t say we’re optimistic. We’re trying to make sure we’re relevant and ready, as well as leaning in on publicprivate visibility. It’s not as if it’s just a solving-capital-markets problem.”
Nor should the flight of capital from local equity and bond markets be seen just from a South African perspective.
“It’s also about how other investors are investing. When you have the geopolitical tension which was Russia-Ukraine, any of the push and pulls between the East and the West, people were going into safe haven places. So it’s not just South African markets, it’s global markets.
“If you look at the US only seven stocks have been driving that market. If you look at the UK there’s almost zero investment in their own equity market.”
Didn’t the London Stock Exchange (LSE) have its strongest listings performance last year since 2007?
“Off a very low base. They had a higher rate of delistings than the JSE.”
The LSE has been doing a lot to resurrect its performance, she adds.
As has the JSE, of course. A major difference, Reddy says, is that the LSE has not had to contend with the same macroeconomic environment the JSE has. “There are different drivers in each market.”
The elections in May have added a whole new level of caution. “You can certainly feel general investor caution going into the elections this year, not just our own.”
It’s hard to call which way things will go after the elections, but the market drivers will be the same, Reddy says.
“The key things that global investors are looking at: the stability of the government, reforms of the fiscus largely through the SOEs, and the execution gusto brought to these reforms.”
We have a deep, liquid market; this is why investors would come. Because right now we offer a lot of value, and investors are underweight South Africa