How casually-dressed IT department helped JSE Limited to a record month in March 2020
The JSE achieved a record March 2020 measured in both value and volume traded, as its casually-dressed IT technicians kept its digital systems ‘up and running’ through the first weeks of pandemic and lockdown. JSE Group CEO, Dr Leila Fourie, told attendees at PSG’s ‘Think Big’ webinar that the exchange was able to weather the crisis thanks to its long-term adoption of technology. “Our value traded was up over 60% in March, while our volumes were up over 100%; our IT department [accommodated this surge in demand] dressed in their daytime pyjamas, from home,” she said.
A love affair with digitalisation
The fact that South Africa’s share exchange was able to seamlessly settle transactions during lockdown does not mean its flirtation with the global digitalisation trend is over. “Pandemic has given us insight into the future adoption of technology across industries,” said Dr Fourie. “We will see a faster uptake of new ways of trading, including digitalised versions of blockchain and widespread adoption of cryptocurrencies”. An unprecedented uptake of technology could usher in an era in which the brick-and-mortar JSE building is confined to the history books. When asked whether the JSE still needed a building to operate from, Dr Fourie noted that there was always something to be said for community and social interactions in an office environment.
An observation that will resonate with financial intermediaries is that the JSE still expects its daily market opening and other investor-focused events to take place in a face-to-face setting once the country emerges from lockdown. This is good news for a discipline that is built, from the ground up, on face-to-face interactions between intermediary and client and adviser-client relationships that are established over many years. Seasoned financial journalist, Bruce Whitfield, who served as host during the PSG webinar, grilled the JSE CEO on the extent of the stock market sell-off in March, the rapid turnaround seen in the months since and the apparent disconnect between financial markets and the economic outlook.
“Global financial markets were down in excess of 30% by the end of March and we have since witnessed several single-day moves that will go down in history,” said Dr Fourie. “Notwithstanding the fact we are trading in a hyper volatile market, we are now [at end August 2020] up for the first time on prior years on both the JSE Top 40 and All Share indices”. The three principle reasons given for the rapid financial market recovery include the high weighting of domestic indices to technology shares, the number of shares with a significant proportion of their total revenue derived offshore and the resurgence of the resources sector.
It is not the economy, stupid!
In 2008, just prior the Global Financial Crisis, resources shares accounted for approximately 60% of the JSE’s market capitalisation. This weighting, which gradually eroded to around 20% over the ensuing decade, has since rebounded to about 40%. “The domestic market volatility took us by surprise; but the speed of the recovery and the fact that the recovery is not reflected in the economic position is equally surprising,” mused Dr Fourie. In her opinion the disconnect between the JSE and the South African economy derives from financial markets being insulated from the shocks in the real economy.
Those involved in valuing domestic companies will already be acutely aware that almost a third of JSE-listed entities are dual-listed on other global exchanges. In other words, the JSE is dominated by firms that have little or no direct bearing on the domestic economy. A similar disconnect exhibits in the United States where much of the recent financial market recovery is due to record valuations for technology giants such as Facebook, Amazon, Apple, Netflix; and Alphabet, previously Google. What does the future hold? Whitfield singled out inflation, offshore diversification and prescribed assets as areas that might concern local investors and their financial advisers.
An outright affront to the free market
“The prescribed asset concept runs contrary to free market forces,” opined Dr Fourie, who suggested various alternatives that could achieve similar outcomes. Top among these was increasing investors’ exposure to low liquidity listed and unlisted opportunities in the private market asset class. Ironically, the solution to prescribed assets lies in tighter compliance with another restrictive regulation. “Even though regulation 28 allows for a 10% allocation to speculative stocks, less than half of that is taken up by the industry; we need to stimulate investors’ risk appetites to start investing in lower liquidity stocks,” she said.
Dr Fourie was less concerned than most about the local versus offshore constraints imposed on South African retirement savers by regulation 28. “There is a natural rand hedge aspect to many of our Top 40 stocks, with 70% of them deriving revenue ex South Africa; this gives local pension fund and asset managers the ability to shield investors from the domestic macroeconomy,” she said. From a JSE perspective government could still make improvements to the exchange control environment to allow offshore investors to complete their collateral and settlement obligations in dollar instead of rand.
Inflation is down; but not out
“Is inflation dead?” asked Whitfield, postulating an ‘end of world’ scenario following pandemic. “It would be naïve to imagine that growth will disappear from the general economy worldwide,” responded Dr Fourie. The main factor informing her view is that large economies will attempt to “inflate away” their post-pandemic fiscal debt burdens. “Inflation is not dead,” she concluded. “We could see it flatline for longer than expected in larger economies; but high levels of indebtedness among individuals and corporates will create genuine concerns at central banks about how they manage potential inflationary spikes down the road”. From a financial advice perspective, you may wish to prepare your clients for a couple more years of low returns from riskier asset classes.
Writer’s thoughts:
Among the observations shared by Dr Leila Fourie, Group CEO of the JSE, during her participation in the PSG ‘Think Big’ webinar, is that the inflation outlook in developed markets post-pandemic remains benign. It seems to be quite benign domestically too, making the big question that local investors must wrestle with: “When will we see a return of inflationary pressures?” Are you more concerned about generating real returns in a low inflation environment or the inevitable return of inflation? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts [email protected].
