The rand's collapse in late 2001 gave asset managers the opportunity to plunge aggressively into the market. The FTSE/JSE all share index (Alsi) raced away to hit a record high in the value of shares traded.
Last year's R809bn was a third up on the R606bn traded in 2001. It was a record in the JSE Securities Exchange's data books that turned out to be as hollow as the Alsi's peak. Inflated share prices produced inflated turnover values. As the market bubble deflated, so did trading values, which have dwindled to around two-thirds of their 2002 peaks.
Last year was a case of intense market action fired by incorrect market views. Monthly surveys of fund manager sentiment conducted by Merrill Lynch during the Alsi's blow-off phase tell a tale of investment lambs led to the slaughter.
SA fund managers entered 2002 as raging bulls. As the rand declined, they were more and more eager to chase the market higher. By April 2002, average exposure to resources shares hit 40%, the highest level in two decades, in perfect sync with the sector's peak.
Richemont was a classic example of caution thrown to the wind as the share was driven 80% higher between October 2001 and March 2002. This was despite a warning issued by Richemont's management in November 2001 that "the current year [2002] will be disappointing".
Fund managers thought they knew better. A global economic recovery could be counted on and a weak rand was a dead certainty. Their view a year ago was that the rand would be above R11/US$ in June 2003.
Both key inputs in their investment equation were horribly wrong. Clients paid the price as the Alsi slid 30%. Given an extra bearish shove by the mining empowerment charter, the resources index shed 40% of its peak value.
Government's promise not to destabilise the mining industry fell on deaf foreign ears. Global fund managers, a twitchy bunch at the best of times, turned net sellers of R6bn in SA equity last year. With them went demand that had bought R156bn in SA shares between 1997 and 2001, a level that new investment inflows into local institutions will be hard pressed to fill.
But it is not only market indices that have a decidedly shrink-wrap feel to them. A steady exodus of companies from the JSE continued in 2002, with nine new listings dwarfed by 79 delistings (see page 162). Acquisitions, management and private equity buyouts accounted for just over half the delistings; noncompliance with listings requirements and bankruptcies each accounted for just under a quarter.
It's not that the JSE hasn't been busting a gut to attract investors, foreign or otherwise, into the market. The exchange has pulled out every technological miracle in the book, starting with its Jet automated screen trading system in 1996.
In 2002, it introduced dematerialised electronic share certificates (Strate) and entered a partnership with the London Stock Exchange (LSE). With that came a new series of FTSE/JSE indices in May 2002 and the LSE's Sets trading system.
"Strate is unique in the world and is going fantastically," says JSE deputy CEO Nicky Newton King. Sets has also been a resounding success, she adds: "We have not had a single failed trade since its introduction. Before that, more than 50% of trades were not settled on time."
Electronics has also delivered some of the answers to the exchange's quest for improved liquidity. Based on the total value of shares traded compared with total market capitalisation, liquidity surged from 7,5% in 1995 to 34,6% in 1999. But from there on it has been a crawl.
Liquidity edged up further to 38,5% in 2001 and 39,1% by 2002. This is still about a third of the liquidity levels achieved by the New York and London stock exchanges and around half the levels in Australia and New Zealand.
Attracting the individual investor back into the equity market may hold the answer to SA' s liquidity logjam. A survey in 2002 by the Australian Stock Exchange, which has a liquidity ratio of 67%, revealed that 37% of the country's adults or about 5,4m people owned shares and managed their own share portfolios.
"The realities in SA are low disposable incomes and a small savings base," says Newton King. "But we are looking at ways of attracting smaller investors back into the market."
Until then, SA fund managers are likely to continue trading in the same limited number of Alsi top-40 big-cap shares.
Though trading value increased sharply in 2002, the volume of shares traded fell 6,5% and the number of deals was 9,8% down. Fewer but bigger deals indicate an increasing institutional concentration in the big-cap end of the market and a decline in volume of smaller-cap shares traded.
"It's a global trend," says Newton King. But it's doing little to enhance small investor perceptions or floundering portfolio performances.
General equity unit trusts show a clear trend towards look-alike portfolios. In March 2003, the top 20 shares in the average fund accounted for 53% of equity exposure, up from 39% in 2000.
Many non-Alsi 40 shares have moved off most institutional radar screens. Little wonder that trading volume in these shares has waned.
Most people who put their faith in investment professionals have paid a heavy price. Between them, 123 domestic equity unit trusts managed to scrape together an average return of 2,8% in 2002. Nor was there any shortage of profit opportunities. A total of 236 shares ended 2002 higher, 179 were down and 23 unchanged.
Bear markets breed new outlets for investment energy and, some would argue, frustration. One that sprang to prominence for a while last year was shareholder activism. "For years, companies have got away with murder," was Allan Gray chairman Simon Marais' rallying cry as his group, backed by Investec and Sanlam Asset Management, successfully assailed the Comparex board.
Another assault was launched by the UK's Active Value Fund against Primedia's board. This succeeded to the extent that Primedia's board was reconstituted in compliance with the King code of corporate governance. Old Mutual Asset Managers blocked a buyout of minorities in Masonite SA.
For the most part, though, most delistings in 2002 took place without a whimper from fund managers, who grabbed any offer that represented a premium to depressed trading levels. This trend is likely to continue while corporate management and private equity funds exploit bargains created by the bear market.
