South Africa - Securities Lending and Construction sector worries

It’s all happening in South Africa at present. Hot on the heels of their global mining conference (“Indaba 2011”) they have a new National Growth Plan announced by President Zuma last week. Plus, pension funds may be allowed to invest up to 10% of their assets in alternative investments, up from 2.5% prior. We will look at the Construction sector due to accusations of collusion on top of slowing profits after the rich pickings caused by the world cup. We will look at Murray & Roberts (JNB:MUR), Aveng (JNB:AEG), Group Five (JNB:GRF):, Wilson Bayly Holmes (JNB:WBO). We can also look at Fountainhead Property (JNB:FPT): given their recent rights issue news. To cap it all, HSBC launched a South African ETF this week (HZAD).

The outlook for the local securities lending market is positive and I was lucky enough to meet many of the local players earlier this week. It was interesting to learn that the regulator (FSB) never banned short selling and that their banks fared rather well during the credit crunch.

This was aided, in part, by “exchange controls” under which local funds and banks were strongly limited in how much money could be invested in overseas instruments. This is being partially relaxed but South African fund managers still need to make most of their investments in locally listed instruments. Banks like Deutsche offer ways round this by listing some of their European focused ETFs on the JSE. ABSA bank announced a capital ratio of over 11% the other day which places them in good shape for the requirements of BASLE III for instance.
The Johannesburg based experts estimate the total value of assets on loan to be around ZAR 80bn. To put this in context, it makes their market about half the size of Hong Kong. The average lending fee over the past year is 58bps but has reached a 52 week high of 79bps at present.

Section 28 is a key new piece of legislation close to becoming law under which domestic pension funds can invest up to 10% of their assets in alternative investments such as hedge funds. This will lead to asset inflows for the likes of Coronation as well as the hedge funds within established South African asset managers like Investec, Old Mutual and Sanlam. Unless this coincides with a further relaxation of the amount of money that can be invested overseas this could lead to greater trading volumes on the JSE as asset managers put this money to work.

70 building projects are under investigation for price fixing by the major construction companies who are accused of allocating tenders to one another in an uncompetitive manner. This explains recent spikes in short interest in Group Five, Murray & Roberts and, to a lesser extent, in Wilson Bayly Holmes. Most of them show recent short covering implying that their shares prices already factor in this bad news. That said, Wilson Bayly reported underwhelming earnings this week. Fountainhead Property Trust shows a trebling of demand to borrow after they announced a capital raising program.

ETFs are increasing in popularity in South Africa. StanLib (formed by a merger between Standard Bank and Liberty) offer two ETFs that track the main index (Top 40 and SWIX 40) and ABSA offer a gold ETF (New Gold Issuer Fund – GLD). The latter sees a rising demand to borrow.

This resource rich country seems finely poised as a place to invest especially since China is trying to slow their economy. Having fallen over 10% year to date investors will be eager to see growth higher than 3% per annum – some say it needs to hit 7% if it is to make an indent into an unemployment rate of at least 25%. If this leads to greater volatility then this is a “win” for their resident securities lending industry and hedge fund industries alongside the positive impact of the potential pension fund investment rule change.