When the CEO of South Africa’s major stock exchange, the JSE’s Leila Fourie, hit the headlines recently for saying outflows of foreign capital from the exchange kept her awake at night, many investors would have been left wondering how alarmed they should be and what action they should take. While the country’s structural issues are well-known and have been publicised for years, epitomised by our sovereign credit rating downgrade, Fourie’s comment was not contextualised. Immediate questions for retail investors would have included the timing of what was a seemingly worrying view. What implications do these outflows have for asset prices, liquidity and investor returns on the JSE?
Though the answers appear to be simple on the surface, the trends are nuanced and it pays to get inside the heads of industry professionals to find out how they view the JSE currently.
Galileo Capital executive director Warren Ingram says the long-term structural macro trend of foreign investors withdrawing from SA in all spheres will continue. “From the real estate market to bonds and equities, foreign investors continue to move money out of the country. Inside that is a cyclical pattern. In assets where things are currently going well, the withdrawal may slow down or even temporarily reverse, but the overwhelming trend remains the exit of capital.”
Ingram cites Jacob Zuma’s ascendancy to leading the ANC as the point where the tide turned. “You can pinpoint it, and it didn’t slow down or reverse when Cyril Ramaphosa took over. In 2007, many good JSE-listed businesses were expensive. We’ve gone from fair value to being ridiculously cheap. At that time, SA fund managers rode the maximum of their offshore allocations and that continued until last year, when asset managers moved their money into domestic assets. The main reason is purely valuations – what some fund managers uncharitably call bottom feeding. They’re finding opportunities based on valuations, but this does not signify a positive structural shift or economic turnaround.”
Protea Capital Management CEO Jean Pierre Verster adds that when SA’s sovereign debt was downgraded, a large amount of money was technically restricted from buying our bonds – exacerbated by perceptions of risk related to the SA economy and political landscape.
“While that is well-known, on the equity side, SA was also included in a number of emerging market indices where our relative weighting has decreased over the last decade because of the strength of China’s growth. Chinese companies have now crowded out most other emerging market counters from FTSE, MSCI and S&P indices, to name a few. Even active managers referencing the same benchmarks would have sold SA equities,” he says.
To make matters worse, the recent Naspers*-Prosus transaction resulted in a significant decrease in the weight of Naspers in emerging market indices and an outflow of rands from the JSE to Amsterdam. “We also saw a greater outflow from JSE-listed retail stocks, because the big run-up in that sector until 2017 was driven by foreign capital. They have now experienced the withdrawal more harshly than other sectors,” Verster adds.
The micro trends can appear confusing. “Money wants to be invested at the highest yields possible, either in debt or for a return on equities. In the last few years, interest rates in developed markets have been slashed, which means there has been a lot of money seeking the highest relative returns and that has tended to be in emerging markets. On a relative basis our bond yields are still very attractive, and cheap valuations are now attracting foreign equity investors again,” Verster says.
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