Archive for the 'South Africa' Category
May 31st, 2011 by Tom Minney
The London Stock Exchange (www.londonstockexchange.com) has long been a global centre for capital, particularly where African investments are concerned. It is also the world centre for Eurobonds and several leading African equities are traded in London. There are several reasons to come to London, either through listing or cross-listing, including being closer to investors and sources of capital such as funds and investment trusts and also because investors may find it more attractive to invest in companies that are listed on a well-known and recognized stock exchange. A few international exchanges, including London, Toronto and Australia, are also known as centres for world mining equities and attract specialized listings..
The LSE’s Main Market lists 18 equities for trading that focus on Sub-Saharan Africa. These are mostly South African firms covering food, industrials and mining and the history began with AECI in 1937 and Tongaat-Hulett in 1939. The main board also includes Zimbabwe’s hotel group Meikles, Hwange Colliery and financial services firm NMBZ; Kenya’s Kakuzi food products and Zambian miner ZCCM. All listings after NMBZ (1997) were incorporated outside Africa, including Channel Islands Jersey and Guernsey, Bermuda and UK. The list doesn’t include the “London Five” – Anglo American, BHP Billiton, SAB Miller, Old Mutual and Investec –of giant firms who caused controversy when they moved from South Africa. Africa is now a small part of their operations.
AIM, the LSE’s international market for smaller, growing companies, was created in 1995 for businesses seeking growth capital, including early-stage and venture-capital, as well as more established companies. Sub-Saharan Africa scores only 55 among the 3,000 worldwide companies. The list is dominated by mining companies, many incorporated in UK, offering investors exposure to gold, diamonds, gemstones, uranium, platinum, coal, iron and other metals and minerals spread across Africa from South Africa to Liberia and Sierra Leone. Also on offer are financial services, farming and fishing, water, computer services, real estate, industrial machinery and alternative fuels. Most of the countries of operation are English-speaking, but others include Mozambique and Somalia.
May 25th, 2011 by Tom Minney
South Africa’s securities exchange, the JSE Ltd (www.jse.co.za), is to launch a set of exotic currency products after demand from some South African banks. These derivatives give investors the advantages of listed derivatives with the flexibility of over-the-counter contracts.
Investors can negotiate the terms of an option contract, choosing the underlying asset as well as the expiry date. SuperDerivatives (SD – www.superderivatives.com), a derivatives benchmark and multi-asset front office system, announced on 23 May that it will provide the market data to power the Johannesburg Stock Exchange’s (JSE) new exotic currency options offering, namely the ‘any-day expiry’ contracts.
The JSE will feed in SD’s independent market data to enable accurate calculation of daily closing prices, ensuring investors are equipped with the most accurate information to inform trading decisions.
Warren Geers, General Manager of Trading at the JSE, said in a press release: “As the South African listed derivatives market develops and matures, investors are seeking more complex structures, such as non-vanilla/standardised options, in order to hedge their specific risk profiles. These exotic products are often illiquid and difficult to price – however with SuperDerivatives’ market data we can be sure that investors know the true market value of the derivatives they trade with us. Accurate data is an essential component of increasing transparency and improving confidence and liquidity in this market overall.”
AD Trading should be reserved for risky assets, if you want to trade forex try FXCM (www.fxcm.co.uk), an international group.
Maria Johansson, Regional Sales Manager UK and Africa at SD, added: “Our data is sourced from trading desks at close to a hundred global and local interdealer brokers, market makers, exchanges and trading platforms as well as top data aggregators. These true live market rates are then acid tested in real-time in the marketplace by active traders.
“Our insistence on broad market data contribution means that pricing information is truly neutral and unbiased, ensuring market participants trading on the JSE will have access to the most accurate information at all times.”
SD is seeking to bring more transparency to all major traded derivative classes including foreign currency, interest rates, equities, commodities, energy and credit by providing prices that reflect the interdealer market. At the core of all its solutions is SD’s extensively sourced and intelligently amalgamated market data, comprising true live market rates that are tested in real-time in the marketplace by active traders and run through a proven pricing model.
Its web-based, market-calibrated solutions are widely accepted as the benchmark for derivatives pricing and customers include leading banks, hedge funds, asset managers, custodians and hedge fund administrators in more than 60 countries, supported by a global network of SD offices with 24-hour support.
Trading professionals on both the buy and sell side benefit daily from SD’s unique combination of unbiased, aggregated market data and sophisticated modeling techniques. The company also provides fully-fledged risk management solutions, award winning derivatives data and independent portfolio revaluation services.
April 11th, 2011 by Tom Minney
So far, South Africa’s JSE Ltd (www.jse.co.za) securities exchange has achieved limited success with its Africa Board, aimed to encourage dual-listing of leading African equities on the JSE as part of a strategy to help capital markets development. On 8 April the JSE Executive appointed an advisory committee (Africa Board Advisory Committee) to boost the JSE Africa Board, part of the main equities market, to achieve its mission and strategic objective to provide a world-class stock exchange platform and help attract capital to the African continent.
The committee was launched in Accra, Ghana, and comprises 9 members from several African countries. Membership of the Advisory Committee will also grow and change over time. The chair is Nathan Mintah, previously a partner at private equity firm Kingdom Zephyr Africa Management Company and having over 18 years’ of investment banking and operating experience. Bolaji Balogun, CEO of Chapel Hill Denham Group, Nigeria is another member.
The task of the committee is to promote the business, goals and objectives of the JSE Africa Board to the main stakeholders of the investment community, including issuers, investors, service providers (i.e. banks, auditing firms, legal firms etc), governments and regulators. The committee is also mandated to advise on operational matters relating to the Africa Board, including reviewing the strategy and development of relevant new products that facilitate capital flows into Africa; advise from time to time on any proposed amendments and/or improvements to the JSE Africa Board model; assist business development efforts by facilitating key meetings in jurisdictions where Advisory Committee members have influence; offer advice on protocol, regulatory interpretation in different jurisdictions and assist in sourcing funding for the operations of the Africa Board.
Speaking at a media briefing in Accra on 8 April, Maureen Dlamini, Executive Head of the JSE Africa Board said: “The Africa Board Advisory Committee will help us achieve the objectives espoused by the JSE Africa Board that include attracting foreign direct investment to Africa in order to provide the finance necessary for development, and to allow the people of Africa to share in the African growth story.”
Mr Mintah said his appointment as Chairperson of the advisory committee is a timely and important challenge: “We need a concerted effort to successfully promote the growth of capital markets on the African continent and the JSE Africa Board is the ideal platform to achieve this goal.”
Dlamini said the world has become aware of the business opportunities in Africa. “The JSE Africa Board is ready and able to provide African companies that have pan-African strategies with a springboard to increase their footprint in Africa, using a trading platform that is widely respected,” she says.
The JSE, which operates Africa’s largest stock exchange, has had two listings since creating its Africa board in 2009. Trustco, a micro financial services group, has seen a 20% boost in its share price since it was listed in February 2009. Wilderness Holdings, a Botswana-based ecotourism company, has climbed 8.7% since it listed in April 2010. Both companies have primary listings in their home markets.
March 30th, 2011 by Tom Minney
Flows into South African bonds turned positive in the last few days, although money is still being moved out of equities. In the 10 days to 29 March net non-resident purchasing of bonds, including repo, structured trades and other transactions, has totalled R9.3 billion ($1.4 bn) inflow, while non-resident investors in equities have taken out R1.6 bn. For much of 2011 (year to date) investors had followed the global trend of less appetite for emerging markets and there have been outflows from South African bonds and equities. Between 1 Jan and 29 March, net non-resident flows into bonds were outflows of R11.2bn, according to Citi, citing data from the JSE securities exchange. Foreign outflows from equities were another R1.5bn, totalling R12.7 bn. This compared with the record inflows of 2010, being a total inflow of R52.0 bn into all bonds and R37.4bn into equities, totalling R89.4bn.
March 17th, 2011 by Tom Minney
South Africa’s securities exchange the JSE Limited (www.jse.co.za) increased Group revenues by 9% to R1,255 million ($178 mn) from R1,156 mn in 2009. The exchange described it in a press release as “a fair year in challenging conditions in 2010” and said it focused on operational projects and responding to changes in the global exchange industry. Results were driven by strong performances from the cash equity market, information products sales and commodity derivatives.
CEO Russell Loubser has also announced that he will stand down as CEO at the end of 2011, having taken the post in 1997. His place will be taken by Nicky Newton-King, who has been deputy CEO for eight years.
Commenting on the 2010 results, Loubser in the release: “The past 15 years have been a time of extraordinary development for the JSE. The diversity of revenue streams in the business reflects the fundamental nature of its transformational journey. The JSE’s ability to remain competitive in our fast- changing industry has been maintained through continued growth in product range and trade volumes, as well as tight management of costs while still maintaining world-class standards.”
JSE operating costs before net finance income rose by 8% to R879 mn (2009: R810 mn) resulting in a net profit after tax of R378 mn (2009: R366 mn). Much of the cost increase can be attributed to costs related to the JSE’s large IT projects, which required increased staff numbers. The JSE has no borrowings and R1,046 mn in cash reserves (2009: R921 mn).
Farewell Russell
The JSE Board has been relatively unchanged for the past decade but CEO Russell Loubser has decided to stand down as CEO with effect from 31 December 2011. JSE non-executive chairman Humphrey Borkum said: “Russell joined the JSE as CEO in 1997 and has been responsible for significant and highly successful innovations. This is not the time to praise or thank Russell for his enormous contribution as he still has 9 months left before leaving the JSE. The time for farewells will come later. I am delighted to announce that the Board has appointed Nicky Newton-King as CEO with effect from 1 January 2012. This appointment is well deserved and will ensure an orderly transition.”
2010 Overview
• Growing trading volumes pushed up equities trading revenue again, up 5% year-on-year to R325 mn in 2010 (2009: R310 mn). The number of daily equity trades increased 13% year-on-year (2010: 94,656). The JSE implemented a new equities billing model to incentivise increased trading in March 2010.
• The interest rate market also increased revenue, partly because of including 12 months of revenue, compared to only 6 months before since it was June 2009 when the JSE acquired the Bond Exchange South Africa (BESA). Like-for-like, revenue fell 10% to R35 mn (2009: R38 mn). Bond market volumes in 2010 were driven partly by foreigners entering the SA bond market, with net purchases valued at R58.6 billion (2009: net positive R24 bn). Interest rate derivatives volumes continued to grow off a low base. The JSE continues to discuss the model and ways forward with all market participants.
• In the equity derivatives market, the number of futures contracts traded rose in value and number, but revenue fell slightly owing to a changed product mix. Trade in international derivatives – that is, derivatives on companies listed on a stock market offshore – grew particularly strongly. The team continues to bring new products to the market. To encourage a move to a central order book and to stimulate greater activity on the equity derivatives market, the JSE introduced the maker-taker billing model in July 2010.
• The commodities derivatives market performed well in 2010 with a 12% rise in commodity derivative contracts to 2.1 mn. This is largely owing to a rise in volumes traded in its oldest product set – agricultural product derivatives – but also aided by the expansion of trade into new hard commodities products thanks to a licensing agreement with the CME Group.
• Revenue from the issuer services division which does listings including equities, bonds and other instruments, rose to R86 mn (2009: R79 mn), mainly owing to the inclusion of 12 months of revenue from the interest rate market. The number of new company listings on the JSE rose to 14 in 2010 (2009:10) including one on AltX and one on the Africa Board. Loubser comments: “Listings remained subdued, an experience shared with most other members of the World Federation of Exchanges. Notably, 2010 saw the listing of Wilderness Safaris – the second Africa Board listing.”
• Trade in currency derivatives for 2010 was slightly down on 2009 levels. In 2010, the JSE added contracts on the Swiss franc and Chinese yuan.
• The Information Products Sales division focused on new markets and grew revenue by 7% to R117 mn (2009: R109 mn). The team also expanded its product range and adjusted some fees to give more retail clients access to data.
Strategic initiatives
The global financial services industry is changing fast and the JSE, haveing already changed enormously, has to keep moving. Big technology projects are central to the JSE’s focus for 2011. Other strategic initiatives include:
• Building consensus on the growth of the spot and derivatives interest rate markets;
• Growing the client and product range in all market segments, concentrating particularly on how to bring over-the-counter (OTC) trade on-market and on how to encourage more foreign activity on the JSE derivatives exchange;
• Unlocking the opportunities for investors on the African continent by attracting listings on the JSE’s Africa Board as well as creating indices on African stocks that allow investors to track the performance of top issuers across the continent.
Prospects
Revenue projections are not possible in the stock exchange industry, since they depend on trading volumes, which are driven by market conditions. Loubser says: “In a globally competitive environment, markets with strong regulation, solid infrastructure and thriving institutions will be better positioned to attract sustainable capital flows. The recognition by the World Economic Forum (WEF) Global Competiveness Report 2010-2011 that South Africa’s securities exchange regulation is the best in the world reflects our transformation from a single product equity exchange to a well regulated fully horizontally and vertically integrated exchange.”
Board changes
Non-executive directors Gloria Serobe and Wendy Luhabe have indicated that they will not make themselves available for re-election at our AGM in April 2011. Chairman Borkum says: “After having served 10 and 8 years on the Board respectively they have both made significant contributions to the JSE’s affairs and I thank them most sincerely”, says Borkum.
Jonathan Berman resigned during the course of the year due to his other business commitments. He joined the Board as an alternate director following the BESA merger.
Lastly, in terms of accepted practice, it has been decided to shrink the number of executive directors on our Board. Borkum says: “Leanne Parsons and John Burke, who are senior and highly respected executives of the JSE, will both stand down as executive directors at our AGM in April.” They will continue to contribute to the Board as alternate directors.
March 2nd, 2011 by Tom Minney
South Africa’s largest private equity company is transforming itself into a long-term investment holding company and aims to raise ZAR 6 billion ($857.7 million), according to a report on Bloomberg. Brait SA (www.brait.co.za), listed on the JSE Ltd stock exchange (www.jse.co.za), lists its business on its website as “is the raising and management of investment funds that are typically classified as Alternative Assets. The current product-set includes private equity funds, mezzanine debt funds and a range of hedge fund solutions. Additionally, Brait deploys its capital in proprietary investment programmes in these product areas. These investments are made predominantly in South Africa and its region. Investors include leading global and South African institutions.” Bloomberg says Brait manages over $800 mn in 4 funds.
Bloomberg reported a statement to the JSE today (2 March) that the money raised will be used to buy 24.6% of Pepkor Ltd, South Africa’s biggest clothes retailer, which has more than 2,800 outlets in 12 countries under the Pep, Ackermans and Best & Less brands and will use a special purpose vehicle to get exposure of another 10.3%. It will also buy 49.9% and lend R221.2 mn in shareholder loans to Premier Foods, maker of Blue Ribbon bread and Snowflake flour.
The news agency quotes Zaheer Joosub, an analyst at Citigroup Inc: “This is one of those investment opportunities that comes along once every 20 years. It’s a very prudent thing to do.”
Executive director John Gnodde will replace Chief Executive Officer Antony Ball. Christo Wiese chairman of Pepkor and Shoprite Holdings Ltd. will take an anchor shareholding – targeted at 33% – and will become non-executive director of Brait.
The new Brait shareholding is additional to the 20% of Pepkor held by Brait Fund III. The agency quotes Gnodde saying: “We are doing the deals to afford the market an opportunity, through Brait, to get exposure in good, cash companies.” He said the aim was to become a long-term investor. As a private equity firm, Brait would have looked for an exit after about 8 years.
According to a previous company announcement on 13 January, as reported on I-Net Bridge: “International investment group Brait S.A.,Societe Anonyme disclosed on Thursday that the company is considering a potential transaction that may involve a significant equity markets capital raising, the securing of an anchor shareholder, the acquisition of investment assets and an internal reorganisation in support of these steps. The group, that that manages alternative assets, with a focus on hedge funds and private equity, said in a cautionary that the potential transaction remains highly conditional and will require, inter alia, regulatory and shareholder approvals.”
Bloomberg says the offer will be 3 new Brait shares for every 1 held and will open on 15 April 15 and close on 27 May. Shareholders representing 57.41% of Brait’s issued share capital have signed commitments or irrevocable undertakings supporting the transaction.
February 15th, 2011 by Tom Minney
The main trading platform of the London Stock Exchange (www.londonstockexchange.com) was successfully switched from the previous system yesterday (14 Feb) to the Millennium Exchange computer system. Technology solutions provider Millennium IT’s systems are widely installed in African stock exchanges.
Africa’s biggest exchange, the JSE Ltd (www.jse.co.za), announced on 3 Feb that it had concluded a licensing agreement with MillenniumIT to move its equity market trading activity onto Millennium Exchange, with the move planned for the first half of 2012. The JSE said the move will make trading 400 times faster. The Namibian Stock Exchange (www.nsx.com.na) also uses the JSE’s systems and both had been using the LSE’s TradElect system.
LSE swaps to compete
The 14 Feb LSE swap is the largest part of the exchange’s IT project. The London bourse bought Sri Lanka’s Millennium IT company for $30 million in 2009, instead of spending on a software package.
According to the a report in Financial Times, this is part of moves by the LSE to regain its position as a leading global exchange. It will adopt a faster trading system to take on rivals, expand into derivatives and streamline its clearing business. Antoine Shagoury, chief information officer of LSE Group, told the FT: “This migration is a crucial step forward in our drive to offer best in class trading services and marks a key milestone in the introduction of tightly integrated transaction technology across our markets,” said
LSE chief executive Xavier Rolet said the Millennium Exchange system is one of the fastest in the world, and can execute trades in 124 microseconds. Speed is a key criterion for luring high-frequency traders. Proprietary traders had been taking market share for trading in UK equities to exchanges such as Chi-X Europe and BATS Europe, operated by US-based BATS Global Markets but the Millennium Exchange is said to be double the average of the fastest speeds on BATS Global system. It is also faster than Nasdaq OMX.
The news came a few days after the LSE announced plans to merge with Canada’s TMX Group, subject to shareholders’ and regulators’ approval. Both exchanges would aim to pool their specialist trading platforms and cut IT development costs, and it would create the world’s biggest exchange by number of listings.
The switchover was delayed from last November, after the LSE’s Turquoise “dark pool” trading system for pan-European equities went out of order and was shut down as it switched to Millennium Exchange. The LSE held back moving its bigger UK equities trading platform away from the previous TradElect system until early this year. The LSE admitted last month that the problem had been caused by “human error”.
The LSE will move other parts of its operations onto the Millennium platform in due course.
JSE takes control
The JSE announced it will relocate its trading system from London to Johannesburg, enhancing operational efficiencies and ensuring trading optimization for market participants. Leanne Parsons, JSE Chief Operating Officer and Head of the Equity Market said in a press release: “We are excited about working with MillenniumIT and providing benefits to our market using their technology solutions”.
She is confident that the adoption of the new trading system will increase the equity volumes traded on the JSE and therefore liquidity: “In our experience, whenever we take a step forward with our trading technology, trading volumes also follow. If we want to remain a world-class and relevant exchange in a highly competitive industry, we must remain abreast of technological advances.”
Parsons explained that one reason to relocate the trading engine to Johannesburg was for increased operational stability. Now the JSE will manage and operate the trading engine itself. Parsons adds that operational costs will remain roughly the same: “The handful of incidents that we have had requiring the equity market to be halted, with reputational impacts, have been related to our international connectivity links. By moving the engine to Johannesburg, we eliminate this problem and are able to offer our clients improved service availability and stability.”
The structure of the deal with Millennium IT allows the JSE to grow trading volumes aggressively without incrementally increasing trading software costs. It also offers benefits for the JSE and opens up a new potential revenue stream by offering JSE stockbroking members the option to co-locate their computer servers near an exchange’s matching engine to cut the time it takes for messages to be sent to and from the trading engine and reduce bandwidth required. Many exchanges worldwide currently earn revenue from renting out computer space in co-location centres.
Millennium IT widely used in Africa
MillenniumIT, which has over a decade of experience in building technology solutions for the capital markets, is headquartered in Colombo, Sri Lanka and is a wholly-owned subsidiary of the LSE Group. Millennium Exchange is the company’s flagship product used by 10 exchanges and other execution venues worldwide and is known for speed and scalability.
Tony Weeresinghe, CEO of MillenniumIT and Director of Global Development at the LSE Group said in a press release: “Millennium Exchange is a next-generation trading platform that offers ultra-fast order-processing capabilities, providing users with a trading experience that is amongst the fastest, most reliable and technologically advanced in the world.”
MillenniumIT has also supplied trading systems to the securities exchanges in Kenya, Mauritius, Tanzania and Zambia, and central depositories and settlement systems in Botswana, Ghana, Kenya, Tanzania, Uganda and Zambia, among others.
The dynamic Stock Exchange of Mauritius (www.stockexchangeofmauritius.com), among the continental leaders in IT, has long promoted MillenniumIT trading and central depository systems. In addition to powering its own markets, SEM has also advocated them on other projects in which it has been involved, such as a central African regional exchange (which did not end up using Millennium IT), also Nairobi, Dar es Salaam, Botswana, Lusaka and the Bank of Ghana CSD.
In particular, MillenniumIT’s Smart Order Router system could support the hub-and-spoke model that is adopted by the Committee of SADC Stock Exchanges. Preparations are done and this is ready to move fast once funding is approved. The model can allow exchanges to continue to regulate their brokers and other institutions, as orders can be routed through local broking houses.
MillenniumIT also won the project for linking the East African Securities Exchanges and helping solidify the East African common market for capital but this too is awaiting funding.
Jit Seneviratne, Head of Business Development, told AfricanCapitalMarketsNews: “MillenniumIT sees a major role for itself in integrating African capital markets and we will use our technology to facilitate this. It certainly helps that we are already powering several exchanges in Africa… We have already identified the manner in which the links can be done. The only challenge if at all, is not in the trading but the clearing and settlement of pan African securities, but we have a plan for this as well.”
January 18th, 2011 by Tom Minney
South Africa’s JSE Ltd (www.jse.co.za) traded 2.1 million commodity derivative contracts in 2010, up 12% on the previous year but still below the record 2.5 mn contracts traded in 2008. The JSE’s Commodity Derivatives market offers grain trading in white and yellow maize, soya, sorghum, wheat and sunflower seed. It also trades metals including gold, platinum, silver and copper and a crude-oil based derivative called the Western Texas Intermediate (WTI), reportedly the world’s most traded commodity.
White maize accounted for 46% of all grains traded on the JSE, wheat accounted for 27% and yellow maize 16%.
The JSE’s head of commodity derivatives, Rod Gravelet-Blondin, said in a press release today (18 Jan) that the local commodity derivatives market continues to attract new participants who aim to eliminate price risks in an increasingly volatile trading environment: “There is far greater understanding among farmers and millers of the uses of agricultural commodity derivatives as a tool to reduce price risk. Because we are a physical delivery market, farmers can lock in prices at the start of a growing season by taking out agricultural commodity derivatives, so that no matter what happens in the course of the year, they will be able to get their Safex price provided they deliver grain to the quantity and quality specified.”
In 2011, the JSE’s Commodity Derivatives market plans to consolidate and build. Gravelet-Blondin says: “That means encouraging new market participants, and continuing to educate people in the benefits and advantages of commodity derivatives.”
Farm productivity soaring in southern Africa
Production is soaring in South Africa and in neighbouring Zambia. South Africa’s maize crop was over 12 million tons in 2010, near a record and helped by relatively strong prices at the start of the growing season, above-average rainfall and better farming practices. Prices are down by about 30% from a year ago, with white maize for delivery in July 2011 now trading at about R1,400 a ton, unusually R80 less than yellow maize, traditionally lower priced and used for animal feed.
Gravelet-Blondin says this is due to: “..a large carry-over of white maize from the previous season, and export demand for South African maize is less buoyant due to improved yields coming out of countries like Zambia. Another factor contributing to the increase in size of the maize crop is the fact that we are now seeing yields of close to five tons per hectare, which is virtually double what we were seeing 10 or 15 years ago. This is due in part to biotechnology, but also to improved farming practices. South African commercial farmers are far more business-minded and professional than was the case 20 or 30 years ago.”
How commodity exchanges reduce risk
Safex was launched in 1995 to provide agricultural commodity derivatives trading as a mechanism to address price risk for producers and users. It started out offering grain futures contracts, but has since expanded its range of traded instruments. It is part of the evolution of risk control. Initially the government used to manage price risks for farmers and millers through price controls. When the market deregulated in the 1990s the price risk moved to farmers and users.
Grains trade on the basis of physical delivery meaning that any contract traded can result in physical delivery to a grain silo in South Africa. However, recently the JSE introduced cash-traded corn contracts, for which physical delivery is not required, which are based on prices set by the Chicago Board of Trade, part of the largest commodities trading market in the world. US corn contracts currently trade at a R450 premium to South African white maize, according to the JSE. These contracts are pure financial instruments which makes them appealing to a broader range of market participants.
Chris Sturgess, general manager at the JSE’s Commodity Derivatives market, says: “The price of South African maize is often correlated to the international prices set in Chicago. But South Africa maize prices fluctuate between import and export parity depending on whether there is a surplus or shortfall of maize. Many traders keep an eye on the spread between US corn prices and South African white maize and look for opportunities to profit from a widening or narrowing of this spread.”
The WTI oil contract can also help companies reduce their fossil fuel costs by buying WTI futures when prices are low. Should oil prices rise, companies will be able to offset higher fuel prices paid at the pump with profits made on the oil futures. WTI contracts on the JSE are traded in rand rather than US dollars, providing greater price transparency for local companies. Sturgess says: “This is something we are encouraging local companies with high fuel bills to explore… Companies can also reduce currency exposure through the JSE’s range of currency derivatives.”
Gravelet-Blondin says there is a greater level of sophistication among commodity derivatives traders seeking opportunities for hedging or profit. For example, it is possible to trade the difference between gold and platinum prices, on the basis that the two prices are correlated and any divergence in the spread provides an opportunity for profit.
December 31st, 2010 by Tom Minney
Foreign inflows into South African Government bonds denominated in Rand were R61 billion (US$9.2 bn), up from R26.5bn in 2009, according to figures from the JSE Ltd. (www.jse.co.za), which runs the country’s securities exchanges. Net international investment inflows into equities were R35.6 bn, down from a record R75.4 bn.
A report on Bloomberg news says it is the first time that inflows into bonds have been more than those into equities since 1994, when apartheid ended in South Africa. It was more than the net cumulative bond purchases of the previous 15 years.
Yields are more than double those on US Treasury bonds. Bloomberg quotes Leon Myburgh, a fixed-income strategist for sub-Saharan Africa at Citigroup’s Johannesburg office: “South African bonds offer some of the highest yields around. Slowing inflation and declining interest rates made them a very attractive investment.”
It has been a year of massive inflows into emerging markets bonds and debt denominated in local currencies, driven as investors searched for higher returns when interest rates in developed nations have been near zero. According to Bloomberg data, “the spread, or yield difference, between 10-year South African bonds and U.S. debt of similar maturity was last at 480 basis points (4.8%), from almost 535 (5.35%) at the start of the year”. Put simply, bond prices in secondary trading increase when interest yields fall.
Bloomberg quotes Jacques Theron, portfolio manager at Absa Asset Management Private Clients, as saying the inflows could continue in 2011. Because the benchmark South African interest rate is at 5.5% (November’s cut was the 3rd in 2010 and the 9th since December 2008) and inflation is near its 5-year low (averaging 3.5% in the 5 months including November), investors may believe that the SA Reserve Bank (central bank) could be one of the few that could cut interest rates further in 2011.
Bloomberg says the combination of low inflation and falling interest rates meant that the bonds returned on average more than 26% in US dollars in 2010, 3rd-best performer after Colombia and Indonesia based on available index data from JPMorgan Chase & Co. Equity investments in South Africa’s FTSE/JSE Africa All Share Index returned more than 29% in 2010, measured in US dollars. Stocks were boosted by takeovers, including US Wal-Mart Stores Inc. acquriing a controlling stake in Massmart Holdings Ltd., and Nippon Telegraph & Telephone Corp. purchasing Dimension Data Plc.
Net foreign inflows into SA bonds helped the Rand (ZAR) gain 42% against the dollar, making it the best-performing emerging market currency, over the year.
Trevor Barsdorf, an analyst at Econometrix Treasury Management, is quoted as praising prudent debt management. Finance Minister Pravin Gordhan said on 27 Oct. that the country will keep its budget deficit to 5.3% of gross domestic product (GDP), down from a February estimate of 6.2%, and aims to reach 3.2% by fiscal 2014. Greece’s fiscal deficit was 15.4% of GDP and Ireland’s 14.4% in 2009.
Prospects for 2011
On the contrarian note, Bloomberg cites Manik Narain, emerging-markets strategist at UBS AG in London. “The best of the inflows into South African bonds is behind us.” Inflation has bottomed and will begin to pick up. and it is possible SA could raise interest rates by 50 basis points in 2011, causing foreign purchases of bonds to slow, cutting the currency to an estimated R7.60=USD1.00 by the end of 2011.
However, most remain optimistic. ETM’s Barsdorf says it will strengthen to R6.00=$1 over the year and it could climb as far as R5.50=$1. That would push inflation to below the SARB’s target lower limit of 3% and the bank could cut interest rates by 50 to 100 basis points during 2011.
Werner Gey van Pittius of Investec Asset Management told Bloomberg there could be another $4 billion of foreign inflows into South African bonds in 2011 just from dedicated local-currency emerging-market debt funds: “I can’t see too many reasons not to be bullish on South African bonds. We can’t see an aggressive sell-off on the horizon, unless there’s a massive risk-aversion event.”
December 20th, 2010 by Tom Minney
Two African stock exchanges are among leaders in requesting companies to report on Environmental, Social and Governance (ESG) issues, including South Africa’s JSE Ltd (www.jse.co.za) which this year became the first exchange in the world to require listed companies to move towards integrated reporting which includes ESG reports along with profit figures, as reported on this blog in June. The Egyptian Exchange (www.egyptse.com), Brazil, China, Indonesia and Malaysia are other exchanges discussing with the United Nations Principles for Responsible Investment initiative (www.unpri.org) through its sustainable stock exchanges dialogue.
According to an article in the Financial Times (www.ft.com) today (20 Dec), many investors are still slow to understand how to value the ESG reporting companies are giving them. Both Unilever and Rio Tinto have complained that investors are still only interested in short-term performance. Investors’ reasons for not taking interest could include because their holdings are very short-term, because they only work quantitatively, or because they believe that ESG is about imposing one’s own politics on the investee company. The article quotes John Wilcox, of corporate governance consultancy Sodali (www.sodali.com), as saying: “In the US, in particular, ESG is very politicized. Wall Street is not that comfortable with non-numerical issues, so it tends to focus on the financial results. Because these are half-yearly or quarterly, it tends to reinforce short-termism. Yet long-term success is a function of many things that do not lend themselves to quantification such as culture, long-term planning, environmental and social responsibility, human rights and even human resources issues.”
In general, it is more visible when investors penalize companies for poor ESG, such as when Deepwater Horizon, a BP oil rig, exploded. Some investors in India’s mining group Vedanta have publicly sold out their shares over concerns about the company’s human rights record (see for instance this article in the Guardian newspaper).
Wilcox is quoted that it is the wrong question if investors ask whether good corporate governance increases economic performance: “The real question is: does poor performance on governance increase risk – and the answer is clearly yes.”
However, there are cases where good governance is rewarded by investors. The example given is Brazil’s Novo Mercado of the Bovespa exchange (www.bmfbovespa.com.br), which demands higher governance standards than the main market. Wilcox says “Companies voluntarily agreed to higher governance standards to list on a more exclusive exchange on the basis that this would attract more capital. It worked extraordinarily well and is the best example we have that good governance is equted with better performance – companies listed on the Novo Mercado have tended to outperform their peers.”
In addition to ESG reporting to investors, there is also a requirement to be accountable where companies are stepping up sustainable procurement policies – the article cites governments, Tesco and Wal-Mart as examples.
Stock exchange and fund management investors are starting to believe that if they take more notice of ESG reporting, they will have a better understanding of how the company is run. Some funds believe there is a way to quantify ESG and Risk reporting as a contributor to excess returns, future competitiveness and long-term increase in relative value.