Challenges and opportunities ahead for the JSE
May 27, 2010
Humphrey Borkum, Chairman of the JSE Limited
Bond markets are regarded by many people as dark, secret places full of
strange alchemy. They remember that it was the mortgage bond debacle in the US
in 2008 that brought on the recession and led the world to the brink of
financial collapse. A bond is simply a long term loan. Most people have at some
stage applied for a loan at a bank and had to pay interest on the amount of the
loan. The bond market operates in exactly the same way.
In the financial markets a bond is an instrument that promises the borrower
(a company or government) will pay the investor (normally financial
institutions) interest over a period of time and repay the full amount of the
loan on a predetermined maturity date. The fact that a number of overleveraged
countries in Europe, particularly Greece, are battling to repay their bonds at
the predetermined dates has led to the nervousness and uncertainty in European
In South Africa the government and state owned enterprises are by far the
largest issuers of bonds.
It is usually large companies with significant
assets which can be used as collateral that use the bond market to raise
capital. The quality of the assets lower the interest rate charged.
Much like the United States and Britain, South Africa is equity centric with
roughly 60% of our average asset allocation consisting of equity, 20% property
and 20% bonds and cash. Germany and Japan on the other hand have populations
with a far greater fear of risk and therefore bond holdings dominate equities by
a considerable margin. In 2009 our market capitalisation was R5,66 trillion for
equities and R1,1 trillion for bonds. The average size of our cash equity trades
was R135 000 and R21,3 million for spot bonds.
During 2009 the JSE acquired the entire issued share capital of the Bond
Exchange of South Africa (BESA) and together with our YieldX market formed the
Interest Rate Division of the JSE. Proceeding with caution and in consultation
with all the various stakeholders we are hoping to create a world class multi
product exchange that will provide a sophisticated trading, clearing and
settlement infrastructure for all its clients. A large, more transparent market
will draw in more players which should in turn lead to economies of scale and
lower the cost of capital for companies needing to fund new ventures. Due
primarily to the interest rate differential between South Africa and the
developed markets plus the growing efficacy of our Interest Rate Division, the
bond market has attracted R30 billion of foreign direct investment to date this
Exchanges need to innovate continually to remain relevant to issuers and
investors alike. In this regard our consolidation of BESA and YieldX means that
by July this year we will have achieved one set of listings and by September one
rule book and one trading platform. It is also our intention to bring the core
liquid part of the bond market to a single place of anonymous electronic
execution or the classic electronic exchange way of doing business. This should,
among other benefits, extend the reach of the bond market to more retail
Australia vs sub-Saharan Africa
Australia’s investment climate has become a topic of conversation as the
financial media pontificates on the Australian government’s intention to impose
a 40% super tax on resource firm’s profits. It appears that BHP Billiton and Rio
Tinto, two of the world’s largest mining companies, are re-evaluating new
capital and exploration projects on a continent that is one of our great rivals
for mining investment.
This scenario presents a great opportunity for South Africa and indeed
Mining companies already know the impediments to investing in South Africa.
They usually cite BEE targets, power restraints and an inflexible labour market.
Their main concern about sub-Saharan Africa is lack of infrastructure. However
if Trevor Manuel’s National Planning Commission can persuade our government to
keep economic policy and mining regulations stable over the next couple of years
this region can attract more foreign investment for exploration and new
ventures. Oil has been discovered in Uganda and who knows what can still be
extracted from beneath our soil. Mozambique, for example, is just starting on
its voyage of mineral discovery and development.
The mineral resources of sub-Saharan Africa was a key consideration in the
JSE launching its African Board - offering dual listings to firms from outside
South Africa and setting fees that would only cover our costs. For the last
fifteen years and, more recently at the World Economic Forum for Africa
conference, we have been encouraging policymakers to harmonise their bourses
electronically to the JSE with the aim of growing capital markets in the
Another fact that has come to my attention concerning Australia is that
almost half of its equity trading is conducted by 5,7 million investors or
roughly 27% of the population. In South Africa only 200 000 investors (0.4% of
the population) invest directly in the stock market. This presents a challenge
for us to try and emulate the Australian statistics.
In this regard the JSE sponsors a number of projects in an attempt to broaden
our future investor base by familiarising the youth of South Africa with the
workings of the JSE. The most recent is the JSE Investment Education Project
(Jiep) which has the aim of growing the economy through taking financial
knowledge and literacy to the schools. I wish these subjects had been included
in my school curriculum!
Commencing in 2007 Jiep was first implemented throughout Gauteng in 250
schools. Kwa-Zulu Natal has 50 participating schools and we are now extending
the project to 50 schools in the Eastern Cape. Grade 9 and 10 learners receive
practical financial education on budgeting, saving and managing bank accounts in
the first year and investment principals in the second year. The course material
and lesson plans are provided by the JSE.
Another project is the JSE/Liberty Investment Challenge in which school teams
test their share trading skills through an annual simulated ghost trading
programme. In the Challenge which has been in place for over 30 years each team
is given an imaginary sum of R1 million to invest in JSE listed shares and the
performance is tracked and measured against other teams taking part. Substantial
prizes are awarded to the top performers.
This article first appeared in Business Report