African growth story offers plenty of opportunities
By Humphrey Borkum, Chairman of JSE Limited
Its been a tough year for world markets with the total value of share trading by World Federation exchanges falling 14% in the first half of 2012 after an earlier drop of 4% in the second half year of 2011. Here in South Africa although a number of our indices are bouncing around at record levels, low volumes on stock exchanges worldwide and on the JSE are a clear indication of uncertainty and lack of confidence in the immediate future.
I don't really expect any significant improvement in our market for the first half of next year. However no one rings a bell when the market turns but I believe that when it does the magnitude of the upturn will be surprising.
In October, together with JSE Chief Executive Nicky Newton-King, I attended the 52nd General Assembly & Annual Meeting of the World Federation of Exchanges (WFE) in Taiwan. The WFE is the trade association of the 59 largest publicly regulated stock, futures and options exchanges in the world. The JSE successfully hosted this meeting last year.
I was frankly amazed at what an incredible country Taiwan is. It has one of the highest standards of living in the world with an employment rate of 95%, a strong work ethic and the most friendly people I have ever come across.
It surprised me to learn that the vast majority of the tourists that visit Taiwan come from mainland China – a strict limit of 10 000 per day enforced by both countries. The people of Taiwan regard themselves as Taiwanese, not Chinese, who they say live on mainland China.
After networking with numerous delegates and attending a number of the workshops at the WFE meeting I identified some of the issues facing member exchanges at present:
- How can transparent trading venues compete with alternate trading venues or dark pools. Dark pools are venues where trading liquidity or a supply of shares exist that are not displayed for all to see. These are often used by trading participants wishing to execute larger trades without advertising interest through an open book.
- National mergers amongst stock exchanges are in, international mergers are out. Why are regulators and anti-trust commissions unconvinced that foreign owners will develop their markets better? Will banks re-take ownership of exchanges?
- Is it inevitable that fragmented markets will replace centralised markets in a similar way that screen trading replaced floor trading?
- The importance of regulation as a unique value offered by exchanges as opposed to unregulated trading venues.
- Technology risk management in capital markets. Technology has shaped the architecture of capital markets globally and it is imperative to realise the inherent risk that lies in the stock exchange industry's dependence on information technology.
- Market volatility may be making retail investors wary about the stock market but they continue to find exchange traded funds and other exchange traded products useful tools for investment.
In contrast to the issues facing the major stock exchanges that are members of the WFE, the next few years will be of critical importance to many of the exchanges on the African continent.
There is significant interest in the 'African growth story'. The World Bank in its comprehensive 2009 report estimated that the required investment in infrastructure on the continent was $93 billion (R791 billion) over the next ten years. It further estimated that there is a funding gap of about $30 million (R255 million) per year that will need to be sourced from somewhere.
If many of these African stock exchanges wish to play a part in fuelling the African growth story they will need to up their game and establish the necessary criteria to both attract investment and convince issuers to list on their markets. There are over 25 exchanges on the African continent yet only four are members of the WFE – Johannesburg, Mauritius, Egypt and Casablanca. Exchanges are admitted to the WFE through peer review.
The JSE has always been happy to share its experiences with the rest of Africa. With this in mind the JSE organised a seminar on 'Building African Financial Markets' in Johannesburg in September. This was attended by 150 delegates from 14 African countries.
All who participated will now know what is expected of them if they are to share in Africa's growth. While there are arguments that can be made for and against every country having its own dedicated stock market, every exchange does not need to buy and maintain its own technological infrastructure. Here co-operation between exchanges makes a great deal of sense.
As the JSE turned 125 on the 8th November it is interesting to reflect back on some of the significant changes in the industry during my working career. One of the most significant of these must be the electronic settlement of trades.
As exchanges have evolved they have always adopted the technology of the time. I still remember when pen and paper were the tools used to record trades and chalk and chalk boards were the basic technology used to display prices.
For over a 100 years we battled with the frustrations of paper script - lost script, stolen and forged share certificates, safe custody storage problems, slow delivery from overseas and from mail and messenger services.
Our 'Little Bang' went off in 1995 and the closing of our trading floor a year later ended 108 years of open outcry. The introduction of electronic trading enabled us to establish Share Trading Transactions Totally Electronic (Strate). It acts as the Central Securities Depository for electronic post trade settlement of the financial products traded on the JSE. In short, Strate gives us finality of settlement on the fifth day after trade and timeous and accurate payment of dividends and other corporate actions.
At the time Strate was being established the JSE was still owned by its members and although electronic trading upped our turnover we still needed additional funding for the venture. The result is that the JSE now owns 45% of Strate and the four major banks the balance. The dividends we receive from Strate are reflected in our annual report.
I was extremely pleased to hear that Strate recently won the Small Company category in the Deloitte 'Best Company to Work For' survey and I offer my congratulations to all concerned.
As we approach the season of goodwill I would like to say a few words about the Strate Charity Share (SCS) programme. Since its inception 10 years ago SCS has donated R2 million to a variety of needy causes. The funds are derived from share donations by investors often in the form of odd-lot share certificates which SCS then aggregates, dematerialised and sells.
It does not cost the person making the donation anything and to encourage participation the SA Revenue Services allows the value of any shares donated to be deducted from taxable income. For a shareholder paying tax at the top rate of 40% the donation of a share valued at R2000 results in the nominated charity receiving R2000 and the donor reducing his/her tax liability by R800. SCS donations can be made through the investor's stockbroker or by contacting Strate on 011- 759 5300.
As this is my last column for the year I would like to wish readers health and happiness over the festive season and prosperity in the markets for 2013.
This article first appeared in Business Report