The JSE's R100bn foreign investor slip-up 'is embarrassing but not devastating'

The Jo'burg Stock Exchange. (Paul Botes, M&G)

The Jo'burg Stock Exchange. (Paul Botes, M&G)

“There are three kinds of lies: lies, damned lies and statistics,” American satirist Mark Twain famously stated. Last week, erroneous statistics tripped up South Africa’s financial markets.

Published by a now embarrassed and contrite JSE, the statistics suggested foreign investors were buying up South African equities at record levels: good news for South Africans who have come to expect dour headlines about the realities of our stuttering economy. Even the South African Reserve Bank took a moment to acknowledge seemingly hefty inflows in its most recent decision on interest rates.

But when something seems too good to be true, it usually is.

Figures showing that R100-billion in shares, snapped up by nonresidents, were corrected to reveal that in May and June foreigners sold R16.1-billion and R20.3-billion respectively, and bought a mere R50-million in July to date.

Although the numbers were not anywhere as stellar as they first appeared, they are not the only ones to consider, and the news is not uniformly bad, according to analysts.

Against a background of foreign money pouring into emerging markets, the conclusion that South Africa is suddenly infinitely less attractive than its peers would be incorrect, says Rand Merchant Bank economist Isaah Mhlanga.

Bond inflows into South Africa “remain very strong”, he says, notwithstanding concerns about South Africa’s low economic growth, forecast at near 0%, and talk of a possible technical recession later in the year.

Thanks to negative yields in developed markets, there is renewed appetite for South African bonds in particular and emerging market bonds in general, he says, adding that South Africa has seen the best bond inflows year to date, since 2013 reaching R49-billion.
Last year, over the same period, they amounted to some R9-billion he says.

According to Reserve Bank data, 2015 overall saw net outflows of bonds of R30-billion.

This is entirely a “yield-chasing story”, Mhlanga says, given the negative returns investors are getting in advanced economies. In a world where “returns are very scarce” and South African bonds give a yield of between 8% and 9%, “it’s a no brainer”, he adds.

But he expresses concern that the bank’s monetary policy committee cited the incorrect figures in its recent interest rates announcement.

“The [committee statement] did point to a positive outlook on the rand based on strong equity inflows,” he says.

Although the central bank said these figures did not influence its medium-term views, there was some uncertainty over whether the incorrect numbers “will have any bearing of any sort”, he says.

The central bank assured that the incorrect stats did not affect its interest rates decision. According to spokesperson Jabulani Sikhakhane, the figures have also had no effect on key information such as the balance of payments. This is because these figures are published with a lag of at least a quarter.

Portfolio flows form part of the financial account in the balance of payments, he says, adding that revised figures will be considered when the financial account for the second quarter is compiled.

Leanne Parsons, director of information services at the JSE, says some market participants and clients did question the trend the stats were showing in early July, indicating that their clients appeared to be selling.

But she emphasises the clients of other market participants may have been buying. The JSE did look into the matter but that process takes time, says Parsons.

The red flag was a “continuous run of purchases” that did not seem to make sense, says Parsons, especially as the pattern of nonresident purchases is typically far more volatile.

“But, certainly, once we were made aware that we actually have an issue last week, we immediately communicated that,” she says. The problem is confined to only the second quarter data for May, June and July, she adds. “We take this seriously and obviously are very apologetic for our error.”

It was embarrassing for the JSE “but not devastating”, says Wayne McCurrie, portfolio manager at Momentum Wealth.

Money is coming into the bond market and into emerging markets in general, as a result of extra yields offered here, he says. Investors entering South Africa now come at a time when the rand is undervalued.

Had these equities figures been more critical to the view investors held of South Africa, there would have been a far more dramatic effect on the currency when the correction was issued, says McCurrie.

It was testament to the size and liquidity of the market, as well as its changing nature, he adds. Between 60% and 70% of the JSE was no longer priced in rands – thanks to the very large dual-listed and resource companies on the exchange.

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