Fed-led exodus to havens will challenge local market

November 19, 2013


By Humphrey Borkum, Chairman of JSE Limited

During October I spent a week in New York and then, together with the JSE’s CEO Nicky Newton-King, attended the 53rd general assembly and annual meeting of the World Federation of Exchanges (WFE) in Mexico City.

On my return I have been peppered with questions from colleagues on the state of global markets and ,in light of the US debt ceiling crisis, whether these markets are more stable than they were five years ago.

Firstly I believe we should divorce the two issues. The debt ceiling crisis is an on-going political problem. Historically opposition parties in the US have used these negotiations to protest policies with which they are not happy. Congress has raised the cap more than 70 times since 1962 and 14 times from 2001 to 2013.

In 2011 and 2013 the Republicans in Congress have used the debt ceiling issue as leverage for deficit reduction. Due to the polarisation of politics in the US many Republicans have safe seats. They appear only to be worried about being challenged in primary elections from a fellow Republican even further to the right in the political spectrum. This contributed to the intransigence in the negotiations.

However global markets did not overreact and as expected the debt ceiling was raised at the last minute and the issue has been kicked down the road to January and February next year. One viewpoint is that the grandees of the Republican Party, noting the reputational damage this debacle has done to their party in particular and the country in general, will ensure that the deficit battle will move onto other fronts. As Warren Buffet says ‘Never bet against America’.

On the stability of financial markets I am of the opinion that the world is more secure and better placed to withstand financial shocks than we were five years ago. In a column I wrote last year I pointed out the various regulatory responses the world and primarily the US were making to avoid another financial crisis.

Starting with the G20 meeting in Washington in 2008, finance ministers were given a mandate of reducing the systemic risks and increasing the transparency of derivative markets. This was followed through with the Basel lll accords which among others required the banking sector to increase its capital adequacy and improve risk management.
Stock exchanges are now also subject to new and more demanding international standards for payment, clearing and settlement systems.

Questions however still remain particularly with regard to the US banking system which started the financial crisis in the first place. Regrettably it would seem that safeguards are being overwhelmed by the complexity of trading operations and the aggressive bank lobby in Washington. Proposals have been put forward but not yet implemented for banks to create firewalls between their risky trading operations and their retail trading arms. In other words if banks want to gamble in derivatives, they must do it with their own money not with clients’ deposits.

Another issue is the perennial problem of banks becoming too big to fail. Unfortunately there is no easy way to wind down financial institutions as banking operations are now so intricate and globalised. Moreover big banks know their central governments are loath to let them fail because of the local and global ramifications this would incur.

My greatest concern for our market is when the US Federal Bank starts tapering off its US$85 billion-a-month quantitative easing programme. I have no doubt that this will affect the liquidity of emerging markets. As the easy money tap is turned off emerging markets will become jittery as funds retreat to the perceived safer havens of the first world and their rising interest rates. The JSE will not be immune to this exodus which could have the short term affect of weakening our rand and increasing our current account deficit.

The World Federation of Exchanges (WFE) is the trade association for the operators of regulated financial exchanges. With 62 members from around the globe the WFE develops and promotes standards in markets and its members are home to over 45 000 listed companies. Nicky Newton-King is one of the four directors of the Europe -Middle East-Africa grouping. Four African exchanges are members.

At the recent WFE General Assembly delegates made a landmark decision to move the WFE headquarters from Paris to London and approved the membership of Dubai Financial Markets, Hochiminh Stock Exchange, Kazakhstan Stock Exchange, New Zealand Stock Exchange and the Qatar Exchange. A thriving stock exchange is always a symbol of a country’s ability to attract investment.

I was most impressed with Mexico City. It is a vast, vibrant metropolis where I felt safe even walking around at night. In this regard one of the police chiefs in the city has just replaced 60 male traffic cops with women because in his opinion women are more trustworthy and don’t ask for or take bribes. Perhaps our Johannesburg metro police chief can enquire whether the switch has been successful!

One of the panel discussions at the WFE Congress was on ‘sustainability’ aimed at encouraging member exchanges to promote integrated or sustainable reporting. This they could do by incorporating sustainability disclosure requirements into their listing standards. While most stock exchanges have not formally committed to this concept the JSE has carved out an early leadership position on this front.

In May 2004 the JSE launched the Socially Responsible Index (SRI) to guide our listed companies on incorporating sustainability into business policies and practices. These are included in our listing requirements via the King Code on a comply or explain basis.

Some sceptics argue that companies and investors pay only lip service to sustainable reporting. That the financial statements are all that matter. It can also be argued that financial statements are historical by nature and that integrated reporting can often provide a clearer picture of a company’s sustainability in the long term. There is a clear shift taking place and there is no doubt that integrated reporting is going to become one of the essential tools necessary to help predict a company’s viability in the 21st century.

Now two notable anniversaries at the JSE. Last month marked the 10th birthday of AltX our alternative exchange board. Since its inception in 2003 AltX has supported the development of over 100 small and medium size high growth companies resulting in 22 migrations to the Main Board. There is no doubt in my mind that by carefully selecting and monitoring a number of AltX stocks an investor has a very good chance of achieving the same sort of gains over the next 10 years as would have been attained by investing in say, a Bidvest 10 years ago.

This year we also celebrated the 40th anniversary of the JSE/Liberty Investment Challenge in which 317 schools and 38 university and private colleges participated. The awards ceremony attended by the winners from all over the country was held in Sandton in October. Speakers from the JSE and Liberty congratulated the winners on their achievement and pointed out how privileged they were at their young age to grasp the importance of a savings and investment culture.

Gareth Cliff, the MC for the event, debated with the audience and came to the conclusion that the words ‘Winner of the JSE/Liberty Investment Challenge’ were more importance on a CV than an A in maths in their matric exams.

Guest speaker, the ubiquitous Simon Brown, started by saying that if you ask the majority of people in South Africa what PE stands for they would say Port Elizabeth. Those in the audience knew differently. He pointed out the participants in the challenge all had the secret to investment success on their side - time. With the help of compound interest they had decades for investments they made when young to multiply many times over.
For the record Thabo Senior Secondary School of Soweto claimed first place in the Income Portfolio while the Speculator Portfolio and the Equity category were both won by DF Malan High School from Bellville. In the Equity category Bishops and Maritzburg College came second and third respectively.

The University of Western Cape won the University Speculator Portfolio. Apart from the R25 000 prize this team can also look forward to visiting fellow BRICS member Brazil.
There is criticism about our education system not being relevant for the real world. When deciding on a high school one of the questions I would suggest parents should include is whether or not the school competes in the JSE/Liberty Investment Challenge.

Anyone entering the JSE building over the past couple of months will have noted we are in the midst of building operations. The aim is to make the JSE more user friendly for all our stakeholders and the media in general. We are enlarging our main electronic board to enable it to profile the whole market ,not just equities, and we are building two TV studios and a radio studio on the first floor. We are also upgrading the technology in our various events venues making the JSE a convenient facility for a whole range of business activities. We are hoping for completion by the end of March.

As this is my last column for the year I would like to wish readers health and happiness over the festive season and success in the markets in 2014.

This article first appeared in Business Report