JSE provides new international investment options

On Friday, Brics members—a group of stock exchanges in Brazil, Russia, India, China and South Africa, which includes the Johannesburg Stock Exchange (JSE)—will begin cross-listing financial products.

The initiative will allow investors from each local market to access the other participating exchanges through a broker in their home country. Trading will occur in local currencies and will not be subject to exchange controls in South Africa.

The programme, which the five bourses agreed to pursue at a meeting of the World Federation of Exchanges held in Johannesburg last year, is seen by those involved as an important first step in promoting greater integration among rapidly expanding emerging market exchanges.

“It’s a good move,” said Stuart Rees, a lecturer at the University of Cape Town’s Graduate School of Business and former chief executive of South Africa’s futures exchange.
“It increases the range of products that South Africa investors can easily access.”

Ashvin Mancha, chief executive of Afrifocus Securities, agreed. “This opens up a new asset class for South African investors. Private clients [individual investors] now have an opportunity to access markets that they couldn’t previously.”

Investing in Africa
Mancha used India as an example. The subcontinent’s nearly $2-trillion economy grew at an average annual rate of 7.45% between 2000 and 2011. Over the same period, the country’s Sensex exchange delivered a 17% compounded annual return. But, for South Africans, accessing Indian markets directly was not, typically, an option.

“Dealing with India is very difficult,” he says, “you need a PIN [personal identification number] before you can open up a brokerage account.” And to get a PIN as a foreigner, you need to prove that you are a non-resident Indian.

Going through a broker in South Africa was not an option either. Although foreign asset managers are allowed to invest in India, foreign brokers are not. Under the new joint trading platform, Mancha and his clients do not have to worry about India’s red-tape.

This enhanced ability to access overseas markets is, for James Boardman—a derivatives specialist at the JSE, one of the two main benefits of the new initiative, dubbed Bricsmart by participating bourses.

“The benefit for South African investors is that they don’t have to open a foreign account,” he said, “it provides a way for South African investors to get exposure to rapidly expanding emerging markets around the world through their local broker.”

Liquid derivatives
Another substantial advantage of the programme, in Boardman’s view, is that it “gives us [South Africa] more exposure to investors around the world.”

“The significant benefit is lifting the profile of South Africa,” agreed Rees. “The ability for a foreign investor to come into South Africa and hedge his exposure through a liquid derivatives market must be a huge benefit for him, making the underlying asset more attractive.”

Bricsmart will allow investors to trade futures and options. Futures allow the holder of the underlying contract to purchase shares at a certain price on a predetermined future date. Options grant the right, but not the obligation, to buy shares at a predetermined price within a certain time period. Both financial instruments are used for hedging—protecting against possible investment losses—and speculation—investing for financial gain - by investors.

The specific futures and options to be cross-listed as part of the programme include those on Brazil’s São Paolo Stock Exchange (IBOVESPA), Russia’s MICEX Index, India’s Sensex Index, Hong Kong’s Hang Seng Index and the JSE’s FTSE/JSE Top 40 Index. All contracts will be cash-settled in rands and trade during local trading hours.

Boardman expects the new trading scheme to “start off slowly” but, over time, “open up massive opportunities”.

Matt Quigley

Matt Quigley

Matt Quigley writes the weekly economic preview for the Mail & Guardian. His blog on the South African economy can be found at www.thoughtleader.co.za/mattquigley Read more from Matt Quigley