Brics members’ low investment in JSE points to limited economic ties
SA’s links with its fellow Brics members – Brazil, Russia, India and China – have grown exponentially since the country gained membership status in this association of leading emerging economies in 2010. At least that would appear to be the view of government officials and policy makers. But there is one area of conspicuous silence in the Brics agenda — the stock markets.
If the rationale for the formation of the Brics is primarily economic coalition, as it was and is still being argued to be, what concrete evidence is there for growing economic ties? This is especially so for SA, which was a relative latecomer and is the smallest of the economies. Has confidence in SA filtered through to the private sectors of Brazil, Russia, India and China since Pretoria’s entry into the club?
Paying attention to the private sector is an important metric not only for the purposes of measuring the Brics in economic terms (as originally envisioned by Goldman Sachs economist Jim O’Neill), but also as a measurement of the extent to which the relationship has taken on a life of its own and outgrown the relatively top-down political nudging, which can sometimes feel like an arranged marriage.
In fact, the spontaneous and decentralised nature of stock market investment can be taken as a better reflection of the actual confidence levels placed by the Brics countries in SA than the proposed Brics rating agency, which might, as is the nature of ratings agencies in general, miss the mark due to its sometimes arbitrary approach.
Indian and Chinese multinational corporations are blessed with immense capital and are in a position to make investments and acquisitions, provided the prospective market is bullish enough. But how have South African companies been faring? What have the trends been in recent years, particularly regarding the JSE?
With more than 379 domestic listed companies and 800 instruments such as derivatives with an average daily turnover of more than R6bn, the JSE ought to be ripe for cross-Brics investment. This should be all the more so since in 2011 the seven Brics country stock exchanges agreed on a cross-listing benchmark equity index for derivatives — a mechanism for their investors to keep abreast of the general trends in one another’s top performers (those listed on the Top 40 Index in the case of the JSE), and purchase them in their home countries.
As SA has a low savings-to-GDP ratio of 19.5%, foreign investment is needed to compensate for the domestic shortfall in capital. Foreign capital invested in the South African economy amounts to about 49% of GDP. This percentage is exceeded in some of the bigger stocks on the JSE and in October 2017 foreign investment comprised about 38% of JSE-listed company ownership.
Within individual companies the average share of foreign ownership has risen from 30% in 2008, and in the JSE Top 40 only eight companies, mainly the smaller ones, are more than 75% owned by South Africans. The Brics countries have made their presence felt, but it is an underwhelming one relative to their size.
Only three companies from Brics countries made dents worth noting. In August 2015 Chinese group Gold One acquired about 19.96% of JSE-listed Sibanye Gold, becoming the single largest shareholder in the company. The composition of Sibanye’s Chinese shareholder is interesting; being a consortium, the partners include private and government-linked financiers, such as Long March Capital and China Development Bank.
An early example of India-derived investment via the JSE after SA’s entry to the Brics grouping was the listing of Oakbay Resources and Energy, which was listed in 2014. However, the company soon became embroiled in controversy due to a wave of disclosures and allegations regarding "state capture" and the Gupta family’s dealings with SA’s political elite, including former president Jacob Zuma. In June 2017 the company suspended its listing on the stock market due to mounting pressure from its bankers and its auditors abandoning ship.
From the Industrial and Commercial Bank of China’s stake in Standard Bank, acquired in 2007, to Gold One’s stake in Sibanye, most of the Brics investments in corporate SA have been in line with the traditional alignment between SA and China that predates and transcends their Brics membership, with China being SA’s principal export and import partner
However, in 2017 Indian billionaire Anil Agarwal also bought an 11% stake in Anglo American for £1.2bn, making him the second largest shareholder in the group. He followed this up with a $1.5bn investment, which resulted in a total 20% ownership share.
Anglo American also did its bit for Brics commercial integration when in 2014 it made its first shipment of iron ore from the Minas-Rio project in Minas Gerais and Rio de Janeiro in the southeast of Brazil that it wholly owns through its Iron Ore Brazil subsidiary.
Further strengthening the Brics commercial web, the operation’s primary consumer is China. But crucially, although Anglo American was founded in SA, it shifted its primary listing to the London Stock Exchange in 1999 and now maintains only a secondary listing on the JSE.
Minas-Rio was also not really so much a result of Brics alignment, as exploration started there in 2009, prior to SA becoming a member.
From the Industrial and Commercial Bank of China’s stake in Standard Bank, acquired in 2007, to Gold One’s stake in Sibanye, most of the Brics investments in corporate SA have been in line with the traditional alignment between SA and China that predates and transcends their Brics membership, with China being SA’s principal export and import partner.
In addition to China, for SA the main source of investment in JSE-listed companies has been western financiers, particularly the UK. Similarly, hundreds of other companies in Brics countries have recently listed on US and European stock markets.
One of the reasons for the lacklustre influx of Brics country investment in the JSE is SA’s lack of tech companies and tech start-ups, which have been drawing international investment in other countries.
Another important factor has been a reported lack of international investor confidence in the country in its years under the Zuma-led government, which further disinclined foreign investment in the JSE, which grew by just 7% in the period. Crucially, SA’s Brics membership has spanned the entirety of the Zuma presidency.
Rather counterintuitively, however, South African companies have been leading in investing in other Brics-domiciled companies. Though the private sectors of the Brics countries have made investments of their own in JSE-listed companies, these are barely to the expected level. They are much larger economies — the Shanghai Stock Exchange is the fourth largest stock market by market cap at about $4-trillion — and as such SA’s relative leadership in private sector investments in listed companies in the Brics countries indicates an enormous disproportionality. This is after almost a decade of membership.
If SA’s aim is mainly political association with "rising powers" in a multilateral world, Pretoria is closer to its goal than when it first set about trying to achieve it. But if one of the markers of Brics inclusion for SA is a self-propelled level of investment outside official prodding and political encouragement, it has a long way to go.
• Ndzendze is research co-ordinator with the University of Johannesburg’s Confucius Institute.