Word on the street

From Gary Booysen, Financial Editor

Dear Money Morning Reader,

Last week, horror crept up the spine of every stockbroker and asset manager in South Africa. In the industry, rumours spread like wildfire and, in investment circles, this was one of the worst. It was a rumour so far fetched, it would have, and should have, been dismissed immediately if it hadn’t cut so viciously to the core of the industry. I am, of course, talking about the National Treasury’s enquiry into what foreign assets are and how much risk they involve for institutional investors.

Press releases indicated the Treasury and the Reserve Bank’s negotiations were at a critical stage
Seven companies were investigated: Anglo American, BHP Billiton, SABMiller, Old Mutual, Investec, Dimension Data and Richemont. The cause for concern – they’re dual listed stocks (some are listed on the London Stock Exchange and some on others). The accusation stemmed from these counters not being South African companies and that, to invest in them, we would need to dig into our R2 million offshore allowance. If the National Treasury gets their way, and you buy R2 million worth of Anglo, SAB, etc. you won’t be able to take additional funds abroad. This would discourage private investors, but the buck didn’t stop there.

According to Werner Robberts, Stockmarket Sleuth’s investment analyst, if this happens, these dual listed giants will be reclassified and unit trusts will only be able to hold a maximum of 15% of their total portfolio in these foreign companies. This would cause many unit trust managers to sell off some of their holdings in these companies, putting downward pressure on share prices. It was estimated that 40% of the JSE’s value would be wiped out overnight.

Some analysts see this as an attempt to control foreign investing. But, according to Finweek, it’s actually the application of an outdated relic. "Inward listing", as it’s called, is a through back from the old exchange control regulations of the 1960s. This system has been systematically dismantled and replaced by the new prudential rules, which state that investors can invest a maximum of 30% in foreign assets. This is why inward listings on the JSE came about, to stop investors from simply circumnavigating exchange controls by buying foreign companies on the South African exchange. This doesn’t occur in any financial regulations anywhere else in the world.

Foreign investors also won’t be able to buy these companies on the JSE if the Treasury succeeds. The major impact would be on volumes traded on the JSE. Last week, net foreign equity purchases came in at R2.7 billion. R8.3 billion were sales, while purchases came in at R11 billion. That equates to just under R20 billion of the overall value traded by foreigners last week alone. The total net purchases for the year stands at R36 billion. This will also have a negative effect on the currency. Removing R36 billion of capital inflow would see the rand depreciate precipitously.
 
These so called “foreign companies” are the biggest shares on our market and normally trade on the largest volumes and values traded on our exchange. The largest buyers in our market are foreigners and unit trusts. Now take this new classification, and foreigners will be wiped out from our market and unit trust managers will lose a lot of buying power.

It seems the chances of these shares changing from ordinary listings to inward ones are slim to none. Forex traders paid absolutely no attention to the rumour that the JSE was about to drown and the rand strengthened to $7.65 the same day.

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Turning to the markets...

The JSE all share index gained 0.61% yesterday. The gold mining index added 0.84%. Resources closed up 0.71%. Banks and financials added 0.83% and 0.3% respectively. Industrials jumped 0.68% and the platinum mining index lost 0.81%.

London's FTSE100 pulled back 1.12%. The Dow Jones closed up 0.18% and the Nasdaq jumped 0.06%.

Tokyo's Nikkei slipped 1.05%. Hong Kong's Hang Seng pulled back 0.58%.

Brent crude is currently trading at $60.94 per barrel.

Spot gold's trading at $912.75 and platinum was last quoted at $1106.05.

And here's how the rand is performing against the major currencies:
R/$ 8.16
R/₤ 13.15
R/€ 11.37