Interview: Stephen van Coller
How are current challenges facing the world’s capital markets affecting South Africa?
STEPHEN VAN COLLER: Generally speaking our capital markets have done well due to a global glut of liquidity caused by factors such as previous quantitative easing (QE) by the US, present QE by Europe and low interest rates. Investors are chasing yield, which is most likely to be found in emerging markets such as South Africa. The Johannesburg Stock Exchange (JSE) in particular is skewed towards the top 40 stocks, which make up about 70% of its market capitalisation. These top companies are all diversified, so investors are not really buying South Africa as much as they are buying into a liquid exchange with access to growth markets.
With people investing in large diversified businesses, it is hard to say what types of asset classes or sectors are on the up. If you look at the pure JSE stocks, it is clear that we are bearish on commodities or resource-linked stocks given the global downturn in this sector. We are neutral on everything else other than retail, which we believe will receive a boost from lower interest rates for longer, as the short-lived fuel price drop put more money in the pockets of consumers. South Africa has a cumbersome economy akin to a lumbering giant. We move slowly in and out of cycles, so interest rate rises will be slow and will not have significant immediate impact on the markets.
Demand for credit has flipped around in the past year. South African companies are not really investing and there is quite a lot of excess capital around. You can now find stocks with a 4-6% dividend yield and growth, whereas bonds are only getting between 6-8%. The current question is, would you choose some capital growth plus a 5% dividend yield in a blue chip stock, or 7% in government bonds?
Another interesting development is that the Reserve Bank is now allowing banks to use investment grade assets as collateral for liquidity as there is demand for investment-grade assets. Therefore, the shortage of investment-grade credit is due more to structural reasons than to the current state of the economic environment itself.
In what ways will exogenous factors affect capital flows coming into South Africa?
VAN COLLER: The main drivers – Europe’s QE programme and impending US interest rate rises – will have opposite effects. The QE will be positive and should result in inflows, putting money into financial institutions as people look for yield. Rising US interest rates will have a negative impact, so the bond markets and exchange rate will struggle. But remember, South African bonds have high yields and are very liquid because the rand is used as a proxy for emerging markets. There is a shortage of government bonds, even for the local banks to buy as liquid assets.
What impact have the sovereign ratings downgrades had on fundraising?
VAN COLLER: It is interesting to look at state-owned enterprises like Eskom and Transnet. If some of their dollar bonds are exchanged for rand, it becomes very attractive to local people, swapping some 11-12% in arbitrage. Opportunities like this can arise from the downgrades. I expect that more innovative funding will begin to take place as a gap opens. Raising funds in dollars is not the most obvious thing to do at the moment because of the exchange rate spread.
To what extent would a new over-the-counter exchange impact the market in South Africa?
VAN COLLER: It all depends on the governance and reporting levels of a new exchange, which can drive confidence and liquidity. I would love to see an African equities exchange with different companies on one exchange trading electronically in any currency. It should be possible to create one market place. That would then provide massive capital for the continent.
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