Interview: Nonkululeko Nyembezi-Heita
To what extent do swings in global investment appetite affect the South African market?
NONKULULEKO NYEMBEZI-HEITA: The high volume of foreign portfolio investment in the JSE is a reflection of the exchange’s attractiveness and an indication that it is not really an emerging market bourse but rather an international one. For the past few years we have been ranked the best-regulated securities exchange globally by the World Economic Forum and are also perceived as an emerging market bellwether. International inflows are significant in our bond and currency markets especially, and while our equities are attractive, the fact that they can be traded on several other venues means there is a bit of fragmentation, which we try to limit.
Global developments such as the US quantitative easing programme led to the availability of a lot of cheap money and, with international investors chasing yields in emerging markets, we became an attractive option and gained increased inflows. However, when the programme announced its tapering and emerging markets experienced significant outflows, our market capitalisation was the least adversely affected. This is mostly due to rand hedges, as a lot of companies listed in South Africa earn money largely offshore and thus any depreciated rand multiplies earnings, making them more attractive for investors.
While international pullback and other developments such as the recent sovereign ratings downgrades are very much a concern for us, no mechanism is required to mitigate trading in light of our correlation to the global market. All we can do is ensure that we provide a safe market in order for people to implement their emerging market views and provide the kind of platform that is on par with the best in the world.
What factors drive initial public offerings (IPO) and mergers and acquisitions (M&A) in South Africa?
NYEMBEZI-HEITA: Globally, IPO and M&A activity is a factor of the economic cycle. Within a growing economy there will be companies looking for capital, and these may enter the capital markets in order to secure funding. There has been less activity after the global financial crisis, and in South Africa, a lot of the large corporates have significant cash reserves, so there isn’t much of an appetite for raising capital.
In terms of encouraging small and medium-sized enterprises (SMEs) to list, there is potential now that the AltX has been established to cater to those that are fast growing and in need of capital. In addition to giving access to capital and boosting the SME’s profile, listing on the AltX provides an incubation phase before firms are moved to the main board (at a lower fee). A lack of liquidity and South Africa’s focus on large caps means SMEs can be neglected and trade at low levels. We have also noticed that only about a quarter of SMEs listed on the AltX make the transition to the main board. However, rather than attributing SME delisting to their failure, most are actually being bought out.
Going forward we will continue to provide education, and also advise if and when it is too early for some SMEs to list, especially when regulation can become too onerous for them. With the establishment of the Department of Small Business Development, South Africa has woken up to the fact that SMEs can drive job creation.
What steps should be taken to accelerate the shift from over-the-counter (OTC) trading to the JSE?
NYEMBEZI-HEITA: Globally, we are seeing a shift from OTC derivatives to exchange-traded platforms, especially after the global financial crisis. However, there isn’t a real driver for pushing OTC contracts to trade on the exchange in South Africa. There is some resistance to taking everything on to the exchange, especially from bigger banks that prefer highly specialised solutions. That said, there is a little more interest on the clearing side, so this would be the first development. The JSE’s clearing house is IOSCO-compliant, so risk management for clearing solutions is on par with the best in the world. It we get this right, it would provide a big benefit to the South African investment community.
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