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
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
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
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
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
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
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
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
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
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