Why are foreign investors wary of the JSE?

And what might change their minds?
Figures suggest that international investors have a particular aversion to South African assets; the country is not seeing the kind of money that is being directed to its emerging market peers. Image: Moneyweb

Up to the end of last week, foreigners had been net sellers of R25.6 billion worth of shares on the JSE so far this year. This compares with net foreign purchases of R30.1 billion over the equivalent period in 2018.

This is despite emerging markets overall seeing meaningful inflows. According to figures from the Institute of International Finance, emerging market assets attracted $25.1 billion (R362.3 billion) of non-resident flows in March, $31.2 billion (R450.4 billion) in February, and $52.6 billion (R759.2 billion) in January.

This would seem to suggest that international investors have a particular aversion to South African assets. The country is not seeing the kind of money that is being directed to its emerging market peers.

The global environment

However, Archie Hart, the lead portfolio manager for the Investec Emerging Markets Equity strategy based in the UK, believes this should be viewed in context. One should be cautious about reading too much into short-term market movements.

He notes that the end of 2018 was very bad for markets around the world, but the start of 2019 has been much better. The performance of the JSE has followed this trend, despite net foreign outflows.

Read: Are the JSE’s gains sustainable?

“If you look at markets as at the end of June 2018 compared to where they are today, emerging markets are up 3% in that 10-month period; South Africa is up about 3% in local currency; and developed markets are up about 4%,” Hart points out. “So, actually, over 10 months, markets are slightly up. But it’s a low growth picture globally, coupled with a fair amount of volatility and uncertainty. I’m not sure that what we’re seeing in South Africa is too different to what we’re seeing elsewhere.”

Last year was also one of the worst in history for corporate earnings expectations. Around the world, the projected earnings of listed companies were revised substantially downwards.

“South Africa was no different,” Hart says. “From the start of 2018 to the end of the year, analysts downgraded their earnings expectations for corporates by around 20%. That sounds like a lot, but it’s fairly similar to what we saw in the rest of the world.”

The questions foreigners are asking

The challenge for investors globally, therefore, is trying to identify where future returns might come from. In this respect, South Africa has some well-recognised challenges.

The local economy is weak, there is still a degree of political uncertainty leading up to next month’s election, and, following the collapse of Steinhoff, concerns have been heightened about corporate governance. The dramatic declines in the share prices of Aspen and MTN have also led to questions being asked about local management teams.

“I don’t think it’s just one reason that they have been selling,” argues Nadir Thokan, portfolio manager at 27four Investment Managers. “I think it’s a combination.”

It is also significant to international investors that local companies are being extremely conservative with their balance sheets. They are not investing because of the weak economic environment.

“Businesses in other emerging markets are stacking up more favourably for foreign investors because they are still investing,” says Thokan. “So they are likely to deliver better earnings growth going forward.”

This is a sentiment shared by Hart.

“The problem we have is the growth outlook is pretty weak,” he says. “Consumers are taking on quite a bit of debt, they don’t have much scope to go out and spend, which means that it’s tough to find growth in the consumption part of economy. At the same time, the banks are facing issues from low economic growth, but also of disruption, most obviously from Capitec but also new start-ups.”

He is less concerned about the robustness of local corporate governance and management.

“There have been a few particular corporate governance issues, but if you look broadly at the overall market, the corporate governance framework, reporting and disclosures are certainly a whole lot better than some other emerging markets that I look at,” says Hart. “Corporates are actually in reasonably good shape, notwithstanding those examples.”

How sentiment might shift

It is therefore not a question of quality, but of growth. This has only been compounded by the lack of a consistent power supply from Eskom.

“If you haven’t got electricity, you can’t grow an economy in a strong way,” Hart says.

Foreign investors are largely, therefore, ‘on-hold’ with regards to South African assets at the moment. There is however potential for this to change after next month.

“The market has an expectation that [President Cyril] Ramaphosa and ANC will win the election, and then what you need to see is significant progress on economic reform, whether that’s state-owned enterprises or the economy generally,” says Hart. “And that can be very powerful if they look to execute that.

“A good example is Brazil where we have a new, reform-minded government and markets have performed extraordinarily well in a short space of time, even without any evidence that execution will be strong,” he points out.

“So I would say the market does have some potential sources of upside, but only if we get strong policy direction post the elections.”

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A somewhat redundant headline?

Bit of a silly Q Patrick.

If I was a foreign investor, incoming Junk status and rand depreciation would be on top of my list.

No one needs from abroad to buy our rand hedge stocks (the only stocks that seem to be performing).

Patrick, Why are foreign investors wary of the JSE?

Answer- Rand depreciation, junk status, lack of sound governmental policies, economic and political uncertainty, endemic corruption, land expropriation or property rights, no rule of law and an extreme lack quality of governance.

Then to top the above off, would you invest in a country where people like Nomvula Mokonyane, Mosebenzi Zwane, Malusi Gigaba and Bathabile Dlamini, are the top choices?

Gross political uncertainty will still be with us for a long time.

THE NDP long term plan seems to have died; because no one refers to this document any longer.

Did it ever really live or was it just another fleeting dream to appease the masses? Like Zuma’s promise of 5 million jobs? Does anyone remember that one?

@beachcomber those were job opportunities. Begging on the street corner also qualifies as a job opportunity…hence mission accomplished by Zuma and the ANC. They have successfully created 5M new job opportunities for beggars.

The NDP was used by the ANC and cronies as a vehicle to get funds released to steal.

Medupi and Kusile was part of the NDP. Look at the spectacular disasters those turned out to be.

Patrick, you ask – what might change their foreign investors minds?

Answer- Sound governmental policies, which will lead to economic and political certainty and property rights. The jailing the corrupt, which will lead to the rule of law and quality of governance.

An election list where the good guys (example Gordhan, Jonas) make it to the top.

Remember, its articles like the below that international investors read.

https://www.nytimes.com/2018/12/22/world/africa/corruption-south-africa-guide.html

https://www.nytimes.com/2018/08/04/world/africa/south-africa-anc-david-mabuza.html

I think the only thing that could change their minds would be if Warren Buffet bought the country and installed his own cabinet…

And they are probably reading the Daily Maverick revelations …

Hey guys, the political landscape has been the same over the last decade. So the political mambo jumbo is not the reason. Locals are even looking to invest offshore. The reason – American growth – 3.4% this quarter – American is flying. Money is moving into tech etfs, fangs, chip efts etc etc, – Incidentally when America grows its just a matter of time before the rest of globe benefits and catches up.

Bobby23,

If American growth was the reason we have foreign disinvestment we would have seen this disinvestment happen 10 years ago.

March 2009 SAP500 = 756
March 2019 SAP500 = 2820

March 2009 Nasdaq 100 = 1197
March 2019 Nasdaq 100 = 7628

Foreign selling on the JSE as of the 1st March 2019:

Net sales/Purchases (2019): -R2 011 746 000
Net sales/Purchases (2018): -R 1 381 552 000
Net sales/Purchases (2017): -R 50 billion (My guess)
Negative – indicates sell

https://www.southafricanmi.com/jse-trading-stats-25apr2019.html

Im sorry to tell you but the reason we are having accelerated disinvestment is articles like this in recognized offshore news papers.

https://www.nytimes.com/2018/12/22/world/africa/corruption-south-africa-guide.html

And once the damage is done it just slowly snowballs.

South Africa has morphed into a viciously racist country under the ANC and just like investors avoided South Africa during Apartheid they are quietly doing the same now.

Well look at it from the eyes of the overseas investor, who see:
– a bunch of wild in-fighting looters running the SA Govt (the ANC);
– rampant corruption and mismanagement;
– growing and close to unsustainable debt;
– poring in of illegal immigrants and resultant xenophobia (10m plus);
– populist ANC policies;
– electricity blackouts and no end in sight to Eskom woes;
– continual bailout of SOE’s;
– emigration of skill to the UK, Australia and NZ;

Foreign investors can choose any country in the world to invest including a few dozen from Africa. Why would you choose a place where voter preference is shifting towards the EFF with its policy of nationalization and old communist ideology. The emigration stats show that highly qualified South Africans of all races are leaving at an increasing rate but still we expect foreigners to invest. Not gonna happen.

This article mentions a few things, but at the root of all, are just three root causes of why (potential) foreign investors are wary:
1. Corruption.
2. Corruption.
3. Corruption.

What might change the minds of potential investors?
1. Stop the corruption.
3. Recover all money lost to corruption.
2. Send the corrupt people to jail.

So far we have seen little of these remedial actions, if at all. Especially the last one.

So Patrick, the “management team” of Aspen consistently grew this company from a small local player with a turnover of R900 million to a large multinational pharma company with a turnover of circa R40 billion (in less than 20 years), now employing almost 10 000 people (3 000 of which in SA) and you argue international investors are weary of SA because of them? You must be smoking the strong stuff boet.

Rather ask the question “ what would make overseas investors less wary!
In my opinion, That’s easy….the same thing that would make local investors less wary…
– If CR had a landslide victory and managed to stay alive long enough to see Justice done
– no discussion of changing the Constitution
– certainly no Nationalisation of SARB
– a removal of racist BEE policies
– Capitalising on our Natural Resources without the help of BRIC countries whose only wish is to extract a heavy price
– investment in education and population control.
– securing our water and agricultural futures
Not a lot….and easily done by a United South Africa if we put our minds too it!

EWC, whether by way of over-taxation (and “compliance tax”), “charters”, BEE laws or land grabs, tends to discourage investors.

The there is the business-hostile regulation bloat affecting our “ease of doing business”.

Besides, overseas jurisdictions are cracking down on corruption, so “invest in the ANC” kickbacks are less attractive.

End of comments.

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