As a global stock market recovery began in early 2003, the JSE Securities Exchange was quick to follow and the all share index (Alsi) rose almost 50% in nine months. For all the relief this brought, though, investors can look back on a year of high returns driven more by sentiment and lower interest rates than by robust earnings growth.
As the strong rand bit, profits went into retreat. Average Alsi company EPS were down 20% by May 2004 from the February 2003 peak. Leading the way, average resource sector EPS fell 40%; even average industrial share earnings, registering a 12% decline, felt the strain.
But it was not a one-way street. The telecom sector, boosted by newcomer Telkom and blistering performance by MTN, was the JSE star with average earnings up 175%. And as consumers went shopping, the general retail sector surged after years of pedestrian growth. Average sector EPS were up 35%. Banks also lived up to expectations, delivering average EPS growth of 18%.
Fortunately for companies dishing up lower EPS, falling interest rates enhanced their value compared with alternative asset classes. Despite its surge, the Alsi's earnings yield still stands at about two-thirds of long-term bond yields, compared with a 10-year mean of just over a half. Similarly, dividend yields on many shares put after-tax returns on fixed interest assets to shame.
Whether this portends a value-driven equity advance or reflects disbelief in the sustainability of low interest rates remains to be seen. Adding to the uncertainty, buying power, a key requirement for a sustained market rise, appears limited.
Indicative of this, the R750bn value of shares traded in 2003 was 8% down on 2002's record level. The main reason was a fall in foreign participation; total foreign transactions were down almost a quarter from R417bn to R333bn. More notably, foreign transactions have swung from purchases to sales, with net purchases of R30bn in 2001 reversing into net sales of R5,5bn in 2002 and R429m in 2003.
New domestic capital flowing into investment markets remains about R85bn/year. Other asset classes such as corporate bonds and securitisation issues absorbed R13,7bn in 2003.
Growth in total new domestic capital flow into investment markets is also moribund at about R85bn/year, with equity facing increasing competition from alternative asset classes such as corporate bonds and securitisation issues which absorbed R13,7bn in 2003.
This situation is unlikely to change, as demand on available new capital by government, parastatals and municipalities is set to rise sharply from R34bn in 2003 to about R40bn in 2004.
Perhaps it is fortunate that demand for capital from new equity listings is low. Yet 2003 was the first year since 1999 that capital was raised by way of a public prospectus. This came from Telkom's listing, which raised R3,9bn, and oil and gas exploration company Exxoteq, which added only R7,5m. The other five new listings in 2003 were by way of introduction of existing capital following private placements, restructurings and unbundlings.
Nine rights issues in 2003 raised a further R2,5bn, the largest being those of Discovery at R875m and Palabora Mining at R849m. The total was less than two-thirds of the R4bn raised in 2002 in 16 rights issues and a fraction of the R14,5bn raised in 1998.
Overall, that shrinking feeling intensified as delistings outnumbered new listings by more than seven to one. The JSE said goodbye to 53 companies in 2003. Though down on 2002's 79, it brought total delistings since 2000 to 283 compared with total new listings of 41 over this period. The market now hosts about 413 companies.
This is 40% down on the record high of 669 companies in 1999 and only three-quarters of the 542 in 1987, the JSE's centenary year. This compares with a 9% fall in the number of companies listed on the New York Stock Exchange from the record high of 3 025 in 1999.
As for longer-term progress, 70 years ago the number of listed companies stood at 273, giving the JSE a net gain of just over two new listings a year.
The JSE is holding out great hopes that its AltX alternative market, launched late last year, will swell the numbers of listed companies, as has happened on the London Stock Exchange's similar Alternative Investment Market.
With only three AltX listings so far, there's a long way to go.
There have been complaints that AltX is not in demand because it is not sufficiently differentiated from the main board of the JSE, in terms of both costs and bureaucratic procedures.
The JSE's reply is essentially that a company that cannot meet the criteria probably doesn't deserve to be listed, and that there cannot be compromise on minimum procedures intended to ensure good governance.
The lack of appetite for AltX probably has less to do with costs and technical requirements than with some of the broader structural shifts outlined above.
