Interview: Stephen van Coller
How do you explain the mismatch between muted growth and performance of the stock exchange?
STEPHEN VAN COLLER: The South African rand, as one of the most liquid emerging market currencies, is used by many investors as an emerging markets proxy. With the Johannesburg Stock Exchange (JSE) rated number one globally in terms of transparency, accessing its companies becomes one of the most attractive ways for global investors to access emerging market dividends and market growth on a liquid basis. So, one must be careful not to correlate interest in our capital markets with interest in South Africa as an investment destination. The level of foreign direct investment that South Africa receives is decent, but not great relative to other emerging market countries of the same size. Meanwhile, smaller economies in Africa are rapidly catching up. The interest in our markets stems mostly from asset managers chasing yields, with investors able to access some truly global companies that offer great dividends.
What is the risk of capital flight from the country?
VAN COLLER: Recently we have seen how quickly money flows out when the rand deteriorates and there are some jitters. Our markets are very susceptible to foreign flows, which have become quite large. Foreigners constitute about a third % of the bond exchange, which is a large proportion. At the moment, local bonds are generating good yields compared to developed markets and we are a net beneficiary of low yields in the EU and the US. But if and when interest rates in the developed world pick up, foreign investors can and will easily go. It is going to be interesting to see how things play out over the coming year. I do not see Europe and the US recovering in the short term, so we should be ok. But the JSE will not continue to grow at the rate it has been, and barring any great change to the rand, we have probably found a happy medium. While foreign investors account for around a third of overall JSE equities, their representation is closer to 50% for the top 40 listed stocks. So the numbers are slightly skewed as there is little foreign interest in the remaining 550 or so listed companies. Some investors are more long-term oriented, but there will always be a component chasing short-term yields as part of their portfolio. The only way to attract more long-term equity investors is to demonstrate that the country can grow by over 3% a year. Failing this, foreigners will have a cap on South Africa as a long-term capital markets investment play.
Which sectors do you expect to be strong performers on the bourse for the coming period?
VAN COLLER: The performance of many of our stocks is highly correlated to the rand. If the rand weakens, the stocks do well and vice versa. A lot of the mining stocks, which carry a big weight on the exchange, are very much driven by commodity prices. Thus, global and macro conditions, rather than domestic sectoral dynamics, are often what influences swings in share prices.
We have seen good foreign interest in South African retailers and consumer goods companies based on the fact that they are expanding north and are set to benefit from Africa’s growth story. However, we are less bullish on retailers and watch this space carefully, as much of their domestic growth has been driven by credit and more specifically unsecured lending, which has slowed down due to increased scrutiny from the regulators and the unsecured lending space approaching saturation.
What trends are you noticing on the markets with regards to corporate fundraising?
VAN COLLER: The bond markets are becoming a bigger fundraising channel for corporates. For banks, long-term lends are difficult under Basel III and it has become increasingly hard to compete on long-term loans with institutions. There is much appetite for local corporate debt, here and offshore, especially if you are an investment-grade corporate. Given that many corporates are cash-flush and in non-expansionary mode and therefore have limited need to borrow, this makes growing the debt market even more challenging for banks.
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