JSE on a high as economy falters

It would appear that Nicky Newton-King has the best chief executive job in the country. Despite data released on Tuesday this week showing slower economic growth — which dragged the rand down to a four-year low on Tuesday — the JSE was trading up 0.66% at midday, unaffected by the local news.

It is not, of course, immune to global trends. That was clear when global markets dropped on the back of indications that the United States might cut back on its fiscal stimulus programme because of revival of the American market. This also affected South Africa.

Newton-King would disagree that her job is easy, battling as she is to increase the JSE's revenue and looking for ways to capitalise on African market opportunities before someone else does.

The JSE's record high performance — it appears to be impervious to the local economy's performance, South Africa's politics, poor commodity prices and manufacturing data and labour unrest, which have an immediate effect on the rand — is intriguing. And some experts believe that it could do even better in the next few months on the back of global giants such as SABMiller and British American Tobacco who are benefiting from the weak rand and generate most of their revenue in foreign currency.

To quote Reuters: "Johannesburg listed shares of companies that reap the bulk of their revenue outside of South Africa in currencies such as the dollar and euro have jumped because the weaker rand makes their balance sheets look stronger."

Their dependence on outside revenue has largely cushioned them against South Africa's rating downgrades and concerns about stability.

Confidence in the JSE took a knock
Dwaine van Vuuren, founder of PowerStocks Research, which specialises in quantitative investing and trading models for the JSE, said: "Over 50% of the all-share (ALSH) market capitalisation is made up from shares with substantial portions of their earnings coming from offshore … the earnings of these heavyweight off-shore earners benefit in rand terms when the rand is sliding."

Newton-King, who has led the JSE from January last year, has her supporters, who believe she has taken further the work started by Russell Loubser, who dragged the JSE into the future by, among other things, closing the trading floor and demutualising the exchange. She has also done a lot to improve technology and the speed of trading, moving the trading system from London to South Africa.

Confidence in the JSE took a knock in 2011 because of some system failures, the longest lasting 12 minutes — an expensive technical hitch that Newton-King said at the time would not be allowed to continue. And she was true to her word.

Her detractors believe that the cost of doing business on the JSE is too high for small investors, a side-effect of it being a monopoly, which is something that she listed as a priority in the JSE Limited annual results to December 2012.

There is also concern that there have not been any major company listings on the JSE for some time. The number of new listings in 2012 declined to 12 from 16 in 2011.

A well-run compan
The JSE is considered by all those approached by the Mail & Guardian to be a well-run company. In a talk given to the Gibs Business School recently, Newton-King said it costs R700-million annually to run the stock exchange, with an annual group revenue of about R1.4-billion, which means it makes a good profit.

Profit after tax declined by 12%, but this was largely due to tax issues associated with the impairment of certain technology costs, the JSE said. Its trade revenues were down in 2012 but those were offset by other revenue lines — interest rate products and market data sales in particular, it said.

Speaking at the release of the JSE's annual report in December last year, Newton-King said that the exchange was continually looking to diversify its revenue base. One of her goals was to encourage dual-listing with African companies and another was to encourage more interaction among the 25 stock exchanges in Africa for both strategic and economic reasons.

Speaking at Gibs, she said if the continent could start from scratch the ideal would be a single exchange for the whole of Africa, because of the high cost of technology and expertise involved in running an exchange.

"But that is not the situation we now find ourselves in, so the answer is to get some important conversations under way with companies around listing on the JSE … co-operating on products, technology and capacity [with existing stock exchanges]."

Under her leadership, the JSE has attracted 12 new African companies, as well as handling four African debt issues and the Namibian government bond. Nigeria is now discussing the cross-listing of exchange-traded funds.

Delivered good service
The JSE is already running the Namibian stock exchange trading technology. Rezco asset manager Rob Spanjaard said the JSE was rated among the top 20 stock exchanges in the world and delivered good service. "No one really complains until something goes wrong. People have come to expect that the JSE will deliver a certain level of performance and take that for granted." He was very supportive of Newton-King's strategy to encourage dual-listing and co-operation with African stock exchanges and companies.

"This kind of move will obviously require a long-term view of the market. Over the years, I am sure we will see some great success stories coming out of there [Africa].At the moment, however, Africa's top 100 companies are South African," he said.

The future depends on its ability to diversify
David Shapiro of Sasfin said Newton-King had inherited a market that had changed a lot over the years, from a stock exchange driven largely by mining companies to a decline in that sector. The future success of the JSE would depend on its ability to diversify or look for new products to offer. Another analyst said South Africa had benefited as an emerging market, which remained largely untouched during the most recent recession, but that did not mean the trend would continue.

"South Africa outperformed the US market over the last 18 months but, when you look at the first five months of this year in dollar terms, the US market is up 17%, while South Africa is down 5%," he said. He was also concerned that the JSE did not appear to have a long-term business plan to deal with rapid changes in the market that it would encounter in the future.

Van Vuuren also believes that JSE bosses cannot allow themselves to be over confident about the strong performance of its top 40 companies. He said the JSE is too dependent on the performance of economies outside South Africa. "Every time the rand falls, the JSE rises, and the caveat, of course, is that this is only true when the rest of the world is doing okay and not falling into a recession."

Large dual-listed companies
He believes JSE growth could slow down if the large dual-listed companies find themselves dealing with yet another recession, or concerns about growth in an economy.

"In other words, provided these companies are growing and earning revenue outside of South Africa and the rand is depreciating, the JSE should continue to rise with the rand depreciation."

Of course, the JSE, with its well-run companies, was seen as a haven by many during the recession and was buoyed by an interest in emerging markets and companies with strategies for expansion.

Independent analyst Ian Cruick­shank said Newton-King's appointment, after she had worked nine years under Loubser, was encouraging because it promised a certain amount of continuity, but there were concerns that she would not be able to bring in fresh ideas to help the JSE adapt to a rapidly changing environment.

"Is she doing enough to grow the business? It all depends on volume of goods trading and only time will tell," he said.

Ironically, it's her diplomatic approach and inherent sensitivity to underlying tensions that were mentioned several times by experts. Cruickshank believes those attributes will make her a good choice to lead the JSE as it looks to Africa for new listings.

"The worst thing the JSE could do is to come across as arrogant and looking as though it is rushing in to assist other African countries, because, as you know, that has given us a reputation for being arrogant," he said.

With a market capitalisation of about $929-billion at the end of 2012, according to figures provided by the JSE, it is the biggest exchange on the continent. It is significantly larger than both Cairo ($60-billion) and Lagos (R55-billion). It is also very liquid with the value of trades hitting R3.4-trillion ($418-billion) in 2012, up from R3.3-trillion ($400.1-billion) in 2011.

Diverse variety of offerings
Although several heavyweights such as AngloGold Ashanti, British American Tobacco, SABMiller and MTN account for a large share of the market, the exchange has cultivated a diverse variety of offerings. There are approximately 400 companies listed on its main board and alternative exchange.

Cruickshank and Shapiro both felt the JSE's service fees were high for independent or small traders, suggesting these needed to be reassessed as there would be opportunities for traders to go offshore.

A regulatory change that had important implications for the JSE was the 2011 decision to alter South Africa's inward listing rules, allowing foreign-domiciled companies to be treated as domestic listings. Although foreign firms had been allowed to list on the JSE since 2004, they had been subject to foreign-exchange rules, which limited the amount of these equities local investors could hold. The lifting of these restrictions helped to make JSE listings more attractive.

Newton-King has received praise for her efforts to improve IT systems, making trade quicker, among other advantages. In July 2012, the JSE implemented a new trading platform in the equities market — the Millennium Exchange — and moved the trading system from London to Johannesburg. According to Newton-King, trades can now be executed up to 400 times faster than with the previous TradElect system.

A year and four months down the line she is being described, in general, as a steady leader who is heading a good company.

At the time of her appointment, she told Bloomberg: "It's a big responsibility. Fifteen years in an organisation gives you a good understanding of the business. I am not anticipating that life in our industry will stay the same. The JSE will have to evolve with it."

Impressive JSE facts
l Ranked first for regulation of South Africa's securities exchanges for the third consecutive year by the World Federation of Exchanges and third in terms of value of bonds traded on an exchange.
l It is also one of the top 20 exchanges in the world in terms of market capitalisation.
l In 2012, 45% of the JSE's data was sold outside of South Africa.


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