The Johannesburg Stock Exchange (JSE) enjoyed a good year in 2013, with its growth far outpacing that of the overall South African economy. However, with capital flows to emerging markets exhibiting some volatility in recent weeks, and domestic challenges such as continued labour disputes a possibility, 2014 may see more modest performance, although potential IPOs may give it a welcome nudge.
The JSE All-Share Index ended 2013 up 21.4%, despite significant domestic macroeconomic challenges, including labour strikes in key sectors, and a slowdown in important export markets. The latest projections from the government forecast GDP growth of 2.1% for last year.
According to Anton Pillay, CEO of Coronation Fund Managers, a South Africa-based asset manager, the mismatch between the JSE performance and sluggish economic growth can be attributed largely to the low global cost of funding and the search for yield that spurred capital flows to emerging markets last year. “Despite the depreciating rand and other domestic factors such as the mining strikes, share prices increased over 2013 thanks in large part to the quantitative easing, as investors chased yields globally,” he told OBG, adding that he expects local annual returns to decline and possibly ease to below 10%.
For foreign investors looking to place their funds in emerging markets, the JSE has been and will likely remain an attractive option, given that it is relatively large (by far the biggest bourse in Africa and ranked 19th in the world), diversified, liquid and well-regulated. Around two thirds of the value of listed bonds and one third of equities are held by foreign investors.
Domestic softening expected
While the QE tapering will certainly have an impact on the exchange, the JSE will have to face a still-complicated domestic environment. The World Bank expects South Africa’s economy to expand by 2.7% this year, up slightly from 2013 but still well behind other key markets in Africa, including Nigeria and Kenya.
The possibility of strikes is hanging over a number of sectors, particularly after last year’s unrest in the mining, manufacturing and transport industries. On January 22, mining giant Anglo-American Platinum announced it had returned to profit in 2013 but that threatened strike action by its employees, who were seeking a near doubling of their basic wage package, could push the listed firm back into the red.
Against a backdrop of labour disputes, which are an annual occurrence, businesses have delayed investments and consumers have reined in their spending. South Africa’s growth has been consumption-driven but consumer confidence has fallen to 20-year lows, while the pace of retail sales expansion had eased to 1.1% in the 12 months ended November.
Consumers could further scale back their purchases should the South African Reserve Bank (SARB) raise its interest rates again to tame inflation and support the weakened currency. On January 29, the central bank increased its repo rate from 5% to 5.5% .
With inflation sitting near the top of SARB’s 3%-6% target range, the central bank had been widely expected to raise interest rates at some point this year, and could do so again. This in turn had driven down bond prices even before the recent rise in the repo rate, but some believe the market’s reaction has been too strong.
As Bernard Fick, CEO of Cape Town-based Prudential Portfolio Managers, told OBG, “Eventually interest rates will rise, but we believe bonds have been over-sold and long-duration bonds in particular remain attractive to us.” However, he cautioned that the fixed-income market will remain volatile, due to shifts in the currency and inflation risks.
Though growth on the JSE may be somewhat more subdued this year, there are forecasts that an increasing number of firms are looking to list on the exchange. According to a report from investment bank Goldman Sachs, 2014 could see the highest level of new listings on the market for three years or more, better than the 12 companies that went public last year and in 2012, and possibly up on the 16 from 2011. This underscores the longer-term confidence in the market as a source of capital and as a means for expansion.
Moreover, many stocks listed on the JSE have extensive foreign operations, including telco MTN, media company Naspers, brewer SABMiller, as well as global mining giants such as Anglo American, Glencore Xstrata and BHP Billiton. Holding equities with significant international exposure could be a profitable strategy for the coming year.