A quest for returns put emerging markets on First-World investors' radar screens in 2004. But the message sent out by foreign investors on the JSE Securities Exchange was mixed.
The net R32,87bn they pumped in was positive, and a welcome change after two years in which foreign net sales had topped almost R6bn.
But the fact that foreign net buying fell short of previous highs was disappointing. In euro terms, 2004's net foreign buying was euro 4,29bn, less than two-thirds of the euro 6,55bn net investment in 1999.
By comparison, the Institute of International Finance says total buying of emerging market equity hit a seven-year high of US$130bn (R1,04 trillion) in 2004 and was double the level seen in 2002.
The benefits of foreign buying of SA equities in a market where domestic investable funds remain virtually static at about R85bn/year was clear, particularly during the fourth quarter when net foreign purchases hit a record R21bn.
This sent the all share index (Alsi) soaring 11% in 14 weeks and the financial & industrial index (Fini) an even more impressive 22%. The year ended with the Alsi delivering a total return of 25,4% and the Fini 48,8%.
For the full year the JSE's total market capitalisation ended 44% higher at a new high of R2,57 trillion with total trade up 37% at R1,03 trillion. But what total trading in SA shares was is something of a mystery. As much as 40% of trade in SA shares does not take place on the JSE, says at Computershare head of custody Tertius Vermeulen.
An important reason for the volume of off-market trading is an SA Reserve Bank provision requiring all asset lending transactions concluded in SA to be covered by rand-denominated collateral.
Most foreign asset managers prefer to employ collateral denominated in one of the key global currencies such as the dollar, pound or euro, says Bruce Allen, head of client services at Société Générale. If foreign players were allowed to use nonrand collateral, it would increase liquidity on the JSE "tremendously", says Allen.
And there is certainly room for improvement. Though the JSE's liquidity, measured in terms of total trading value to total market capitalisation, increased from 35,4% in 2003 to 36,9% 2004, it remained below 2002's record 39,1%. It was also only about one-third of liquidity levels achieved by the New York and London stock exchanges and around half the level in Australia.
Earnings growth in 2004 also presented a mixed picture. In terms of the Alsi, earnings growth was eroded by a 25% fall in average resource company earnings and averaged only 6%. But financials did well, improving average earnings by 19% as did industrials with a 37% increase.
Despite the market's strength, which boosted the Alsi's pe to 14, in line with its 10-year average, it failed to attract a spate of new listings and again experienced attrition of its ranks. By year-end there were 403 listed companies, down from 426 in 2003 and a record 699 in 1999, since then 322 delistings have outpaced new listings by a ratio of 4:1.
At least the rate of attrition could be slowing, with 2004's 39 delistings down from 2003's 53 and 2002's 79. The number of new listings also increased from eight in 2003 to 16 in 2004.
A welcome increase, but compared with the pace of new listings in many foreign markets, the JSE did not fare too well. In New Zealand, PricewaterhouseCoopers (PwC) reported that 2004 enjoyed "the highest level of funds raised by way of initial public offers (IPOs) in the past decade". In Australia PwC reported 97 IPOs, the most since 1999. Similarly in Canada, 2004's 87 IPOs were the highest since 2000.
But on balance, the JSE's diversity suffered again last year. In the oil & gas sector, Energy Africa's delisting left Sasol as the only potential investment and the mining sector was further depleted by Harmony's R6bn acquisition of Avgold. This cut the number of listed mining companies to 39, half the number of 25 years earlier.
In general retail Pepkor was snapped up in a management/empowerment buyout in March 2004, well timed ahead of a further 60% rise in the sector index. The IT sector lost one of its brightest stars in July, when Aplitec transferred its listing to the US Nasdaq market where it has reported a doubling of its EPS.
Barloworld gobbled up car rental firm Avis in March and in December came probably the JSE's biggest loss, when SABMiller bought out minorities in Amalgamated Beverage Industries (ABI).
ABI alone had a market capitalisation of R14bn , almost three times the R5,14bn in total new capital raised by nonfinancial industrial companies on the JSE in 2004. The latter did not include any new IPO, of which there has been only one (Telkom in 2003) since 1999.
Biggest new addition to the JSE was the R3,1bn listing of food retailer Spar, following its unbundling by Tiger Brands in October. The second-largest listing was furniture retailer Lewis, which added R2,8bn, followed by Mvelaphanda Group in support services at R1,4bn, which listed by way of a reverse takeover of Rebserve.
The only other new listing to top R1bn was casino group Peermont Global at R1,1bn. Another big "listing" of retailer Metoz (R3,6bn) involved little more than a name change, following a management buyout of SA operations. Similarly, Business Connexion (R985m) was effectively a relaunch following the merger of Comparex Africa and Comparex.
AltX, the JSE's market for companies not qualifying for the main board, got off to a slow start in August, with its first true, new listing - Xantium Technology. . In total AltX listings added R674m to the JSE's market capitalisation in 2004 and by year-end sported 10 listed companies.
In total R41,83bn equity capital was raised on the JSE in 2004 and though this was up 85% on 2003 it was still well below the R80,2bn raised in 2002. Of 2004's total, resources companies were responsible for just more than over half.
The biggest portion of equity capital raised, R21,23bn, came by way of new shares issued as payment for acquisitions followed by rights issues at R10,55bn. Of the latter, Nedcor's R5,15bn issue was the largest followed by Anglo American at R4bn.
As a capital raiser the JSE again met stiff competition from the Bond Exchange of SA's listed corporate bond market, which raised R16,2bn in 2004, excluding short-term commercial paper issues.
