Hindsight can be inexact. When the FM's editorial team sat to thrash out who stood out as the newsmaker of 2006, there was no obvious winner. Some names came up: Brett Kebble continues to make headlines a year after his death; Jacob Zuma grabbed news space - found not guilty of rape, and corruption charges dismissed - but was not directly relevant to the business world. As business newsmaker of 2006, it was not an individual that jumped to mind, but an institution - the JSE. And, unusually, it grabbed the spotlight mostly for good rather than bad news.
The JSE has had a stomper of a year. Investors have been richly rewarded with an average 30% return on their investments - and that endears the capital market to the public like nothing else. But the institution has also made headlines for changing its own institutional structure - listing itself and doubling its own share price ; and achieving critical mass for its smaller companies exchange, AltX, with a market capitalisation of R7bn, three years after it was born.
WHAT IT MEANS
 Investors have made an average 30%
New listings have exceeded delistings
|
The wave of delistings through private equity buy outs can't spoil the party - they will surely one day return to the market in better shape. New listings have been flowing at an increasing rate: in the past week Tiger Automotive (TiAuto) and Pamodzi Gold (the first black gold company) joined the main boards.
One disappointment - the low black participation in the exchange - is beginning to change for the better.
The JSE's current bull run is one of the longest and most robust in recent history. From its low point in April 2003 to its current peak, the JSE has risen by 219%, or 38%/year compounded. That's a great return by anyone's standards. It's a stark difference from the depth of despair market watchers had reached at its start, after the global collapse of the tech bubble in 2001.
The run has made many people very wealthy, especially top executives who have seen the value of their share options soar in the past three years. Those who took advantage of initial public offerings provided by companies such as Telkom have done well (Telkom shares were offered to black investors at R28 in 2003, and the stock was trading at R134 this week).
For CEO Russell Loubser, life has been exciting. This year he has delivered on a vision he had when he took the CEO job in early 2001, and as president before that. When he took the operational helm, markets were turning against him.
"This was a great year. Listings exceeded delistings for the first time in five years and huge value was unlocked for shareholders," he says.
"There are more listings in the pipeline; we want more foreign listings. We seek more African companies to list on the JSE and more bond listings on the JSE," he says. The latter is a reference to the one area of competition the JSE has been unable to crack: the Bond Exchange of SA, which dominates the fixed interest side of the capital markets.
For the public, the institution matters less than the performance of the shares traded through it. At every level, factors have been supportive. The macro economy is healthy; the weaker rand benefited certain sectors, particularly from the middle of the year. And, at the micro level, foreign portfolio investors have taken a shine to the SA bourse.
The first factor - the health of the local economy - is not new. A combination of falling interest and tax rates coupled with a structural decline in inflation has led to a marked improvement in consumer spending during the past three years. That consumer drive has helped the first line of industry, retail, but this year it translated into a deeper growth push as the economy expanded capacity, resulting in increased investment and infrastructure development. Share prices have risen on the back of greatly improved company earnings.
It's almost as good as the bubble of 2000 - with one exception. The JSE still doesn't enjoy broad-based support among private clients; only around 5% of the market is accounted for by direct private client investment. That is a big difference to the bubble, when small punters rushed to the market to grab their part of the profits being made.
That may be changing. With the all share index (Alsi) nudging 25 000 and property losing favour as investment of choice for individuals, direct share investing may be about to become popular. As in 2001, it could be another sucker's rally, however (see "O utlook" on page 31).
Falls in interest rates have helped the overall economy. Rates hit bottom earlier this year at 10,5%. But the cycle has turned - the first interest rate hike in June came as a shock. It led to a patch of bad news. The JSE suffered its worst loss since the bubble burst in 2000, losing 6,5%. The markets took fright and it looked like the good news had come to an end. But the bulls stayed the course and the market had recovered its losses by the end of July. Despite three further 50 basis point increases, the JSE has continued to smash records, helped by a weakening rand.
That weakening rand has hurt the returns for foreigners, even while helping the export-focus ed side of the exchange. In dollar terms, foreigners trebled their money between the 2003 low and June this year. But their returns are slightly down from then. Foreigners have been attracted by the GDP growth story, as well as the stellar returns (see graph: "Net foreign inflows" on page 29). Foreign portfolio inflows began improving noticeably in 2004 and became significant in 2005.
Foreign capital inflows have helped drive the index but they are not all positive. As SA learnt from the emerging-market crisis in 1998, having large foreign portfolio interests in your market is a risk - those interests can change tack. And global imbalances now are worth worrying about, along with the poor dollar-denominated returns those foreigners have earned from the JSE in the past six months. Strong net inflows of the past two years suddenly turned negative in June, and have been tentative since.
In the global view, Asia, especially China and India, is producing, while the US is consuming - driving the American current-account deficit. Asia is investing its cash in the US, in effect giving the Americans the money to buy the goods the Asians produce. Recent dollar weakness, which will help the US's current-account deficit, will also damage the dollar's credibility as an investment currency. It makes the balance precarious indeed. Should it tip, the world economy will be hurt and SA along with it. It is one factor that makes the JSE's performance this year unlikely to be repeated next year (see "Outlook").
But strong performance of the index has attracted companies seeking to raise capital - a lagging response to the exchange's performance. New listings have been a major success of the exchange over the past year.
Starting in 2000, there was a flood of departures from the exchange, as a lot of listings that had taken place during the bubble years retreated into obscurity. But, as of going to press, the number of new listings in 2006 had edged ahead of delistings (see graph: "JSE listings & delistings" on page 27).
Companies are attracted to the exchange principally because it provides relatively cheap capital. That is determined by what investors are willing to pay for equity, but also the other costs associated with listing: reporting, governance, communications. Those other costs are largely within the control of the JSE, and in 2006, a major institutional reform to lower these costs came of age: AltX. When AltX was born in 2003 it was met with scepticism, classed as a dogs' home, like the older development capital and venture capital markets.
Says Loubser : "I never had concerns that AltX would not work because we will change and adapt it until it works. "
But perhaps the biggest reform for the institution was its own listing this year. JSE Ltd listed on the main board in early June. Loubser gave notice as far back as 2000 that the ultimate goal was to list on itself. One of the first steps was to "corporatise" the JSE and change it from a rather clubby bunch of stockbrokers into a professionally run organisation.
In December 2000 it replaced the JSE committee with an independent board of directors, amended its constitution to be more like articles of association and, to the extent possible for a mutual, started complying with the JSE listings requirements and with the King code on corporate governance.
"In many ways 2000 had a bigger impact on the JSE's operations than listing," says deputy CEO Nicky Newton-King. "Separating ownership from membership as far as was legally possible at the time and putting in the independent board meant we avoided the conflicts experienced a few years ago at the New York Stock Exchange."
Notwithstanding these innovations, the JSE could not declare dividends without jeopardising its statutory tax-exempt status and had limited equity capital-raising options. In addition, membership and ownership of the JSE were statutorily linked and trading in JSE rights (which represented an ownership stake in the JSE) was limited to users (members) of the JSE.
With the removal of its tax-exempt status, the JSE demutualised on July 1 2005 and listed on itself on June 5 2006. It listed at R24,25/share and then fell back sharply as punters sold the share off. But the sell-off didn't last and the share price has almost doubled to R48.
One of the reasons for the huge rise in the share price may be rumours that the JSE might be bought by an overseas entity, like the Nasdaq or the London Stock Exchange.
With the JSE performance at a record high and its shares listed and doing well, the possibility of it being taken over by a foreign exchange are heightened. For now, no more than 15% of the JSE can be owned by a single entity. But, says Loubser, "If a professional operator of exchanges showed interest, and at the same time provided assurances of not moving the markets from SA, then I believe the maximum should be reconsidered."
Now that would make the JSE newsmaker for some time to come.
Quote: With property losing favour as the top investment for individuals, direct share investing may be about to become popular
Ranking the Analysts 2009
