Neil Thomas taking stock
After decades of being run as a cosy old boys’ club, the changes to the Johannesburg Stock Exchange (JSE) over the second half of the 1990s have been profound. The perception, justified by numerous moves to arrest change from the JSE’s main committee, was that the exchange was run primarily for the benefit of its broker members. This caused resentment and ultimately revolt. Breakaway exchanges were threatened, pressure to move into line with global norms intensified from local and international banks, and with more than a fair share of kicking and screaming the JSE deregulated and restructured. Much of the credit for the reforms must go to the JSE’s current management, but there remains a reactionary hint of protectionism. Much of it revolves around money, and not surprisingly, seeing as money is the reason for the JSE’s existence. But right now the JSE is perhaps facing its biggest challenge yet in the form of what looks like serious manoeuvres to set up a rival stock exchange. It might all amount to nothing more than hot air. But the threat has been serious enough for the JSE to “suspend” its general manager of market operations for lining up with the opposition (though the person involved, Mike Bastenie, says he resigned first) and to fall over itself in announcing new developments. The ensuing fight promises to be bloody. Stockbrokers are having a relatively tough time financially, through thin profit margins and low volumes on the JSE. Porsches are being downgraded for 4x4s of dubious Eastern European origin, and recently a few brokers have even been known to accept bar-lunch invitations from journalists. Smaller stockbrokers, the ones really feeling the pinch, are lining up with the rival eChange plans for a second exchange in South Africa, motivated by its claims of reduced costs and fully electronic trading. Many of the larger brokers and corporate members, one suspects, would be happier retaining the status quo. Though JSE president Russel Loubser looks to be trying frantically to speed up full electronic settlement on the JSE, and is flying ideas on regional and international mergers – as well as demutualisation and a public company listing for the JSE – the possible fight between the JSE and eChange, or whoever, looks much like an old-economy-new- economy split. But the question that should concern investors is, if a second exchange is indeed launched, will it be to their benefit? Theoretically, the answer is yes. Increased competition is always good for consumers, the range of equity investment options would increase, costs for investors might come down and smaller companies would probably have increased scope for listing and raising capital.
Practically, the issue is whether South Africa could sustain two stock exchanges. The volumes of shares traded on the JSE are at present low (though not surprisingly low, given recent regional setbacks like Zimbabwe; and certainly much higher than before deregulation). The key to the feasibility of an eChange is in the hands of foreign investors – they could support the volumes needed to make both exchanges work – which in turn smacks the ball lll straight back lll into the lll court of the authorities and local
investment community. Together they need to make South Africa more investor-friendly and realise the country’s undoubted potential to be one of the top emerging markets in the world.
Nasdaq is an ambitious but nonetheless apt example of what a rival exchange can do. Established in 1971, it was originally seen as something of an upstart. But while the New York Stock Exchange might still have a little more prestige, Nasdaq was the pioneer in introducing fully automated trading and providing a home for the type of blue-sky companies that now make up its top performing index.
It introduced a new range of companies and investors to the market, is increasingly exerting influence on the New York exchange (and by extension bourses throughout the world), and can at this stage probably be regarded as the only truly global stock exchange in the world. On a far smaller scale, a rival stock exchange in South Africa would probably position itself along similar lines. The so-called New Age companies do not sit that
comfortably alongside the traditional blue- chip industrials on the JSE. Valuation models are vastly different, with far more attention paid to sales growth than bottom-line profit. This often means higher volatility, so it could be argued that an exchange that would absorb the high tech, small cap and venture capital-type operations would leave the JSE as a more stable reflection of big business in South Africa. It would also offer more reliable indices. The JSE’s All Share index is heavily weighted towards resources and large cap industrial and financial shares. That often masks the over- and underperformance of many of the smaller shares that make up the overall index. A second exchange could incorporate much of the new and second-tier companies that typically are more volatile but also offer stronger growth prospects. Aggressive and conservative investors would have a clearer idea of market movements, which could appeal to the more discerning foreign investors and emerging market funds. Encouragingly, there’s early evidence of foreign investors returning to the JSE in both the bond and equities markets. A second exchange could further encourage that inflow. Besides, the JSE will soon be relocating to Sandton, which begs the question – will it still be called the JSE beyond the municipal confines of the city? It’s much like wondering why the demutualised Old Mutual still retains its name. Old it is, but no longer mutual. Private investors should support moves for a second exchange in the country, at the same time vigilantly holding any rival to promises of lower costs. That’s really what it’s all about – making direct equity investments cheaper and more accessible to the people in the street. Besides, history, as the unit trust industry constantly reminds us, is no guarantee of future performance. Johannesburg has not always been the only home of share trading in the country. At various stages in our history there have been stock exchanges in Cape Town, Kimberley and Barberton. Electronic trading means an exchange can be anywhere – Bloemfontein could be a good home for the rival, with foreign exchange advice from the former cricket captain. As they say, viva le difference, or, in the vernacular, eChange.