JSE not yet settled

JSE not yet settled

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South Africa’s shorter settlement period for share trading has failed to stem the outflow of foreign money from the Johannesburg Stock Exchange (JSE) this year and further reforms are required to diversify the market, according the consensus view of fund managers.

In mid-July, the JSE – Africa’s largest bourse – switched from T+5 to T+3 (trimming the total settlement period from six to four days). At the time, bourse officials said the move would attract more foreign investors, which currently account for about a third of trading, and reduce risk because there would be fewer outstanding trades and increased liquidity.

Average daily trading is worth about ZAR25bn ($1.8bn) so the move to T+3 will release ZAR50bn into circulation, Dr Leila Fourie, JSE executive director said in a statement. “We could potentially be looking at a 7-10% increase in liquidity, depending on current markets and other macroeconomic factors,” she added.

Turnover has indeed increased. To 9 September, the JSE traded ZAR4.16trn ($290bn) of shares this year, bourse data shows. This is up 26% year-on-year, while volumes rose 17% over the same period to 55.8 billion shares.

Negligible effect

However, the shorter settlement period does not appear to be a factor. Up to 8 July, the last week before T+3 was introduced, the JSE’s year-to-date turnover was up 32% versus the corresponding period of 2015.

Foreign investors have also been net sellers this year, to the tune of ZAR84.6bn.

“Since moving to T+3 we haven’t seen a noticeable shift in foreign ownership,” says Grant Pitt, joint head of institutional client services at Allan Gray, which manages $35bn in client assets across Africa.

“Foreign ownership is more likely to be driven by changes in relative valuations and sentiment towards emerging markets, rather than due to a change in settlement days. I haven’t seen any indication to suggest T+3 will make South Africa a more desirable destination for investment. Given time we might see an improvement in liquidity and a boost to trading and turnover levels, but there’s no clear evidence of that yet,” says Pitt.

“The trend globally is to reduce settlement cycles and South Africa was an outlier at T+5. While they have just reduced the cycle to T+3, the developed world is moving to T+2 so we could expect a further move in time,” says Doug Blatch, global head of dealing, Investec Asset Management in Johannesburg.

Aside from changing the settlement period, the JSE should also seek to broaden its equity listings, with the top five stocks accounting for about 40% of market capitalisation, while the top 40 stocks represent around 80%, Pitt estimates. “A larger local investment universe in South Africa would create more opportunities for investors,” he says. “This is particularly relevant considering South African retirement funds are restricted in terms of how much they can invest outside of our borders.” 

The JSE a relatively concentrated market, more so than other bourses. “What would assist in increasing the investment opportunity set is having more secondary listings or GDRs ,” says Pitt

The main all-share index gained 8.6% in the 12 months to 9 September, while over the past few years the index has been moving sideways from 46,000-55,000 points. However, that masks considerable intra-market volatility.

Market heavyweight Naspers is up about 45% in 12 months and trades at a price-to-earnings (PE) ratio of around 100, while brewer SABMiller has gained about 39% over the same period despite a post-Brexit sell off and has a PE of 35.

 Together, this pair account for about a quarter of the index weighting and have helped lift the combined PE to around 24, Pitt estimates, roughly double the historical average, which is a likely major factor in the foreign investor sell-off.

“There has been a lot of disparity in the market, which is great for us an investment manager,” says Pitt, whose firm is overweight on the financial sector. On a four-year time span he tips some local banks to provide double-digit nominal annual returns, while inflation is around 6%. “For the broader market I would certainly be less confident.”

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