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So the JSE has reached yet another “record high”. What should we make of that? Not so long ago when a country’s stock exchange was performing well the citizens and the government of that country would be quite chuffed and feel good about it.
They might feel they were that little bit richer, that general economic prospects were positive and that perhaps there was even a chance of increased employment.
But in recent times stock exchanges and the real economy seem to have drifted apart. Strong stock exchange values are not predictive of a strengthening economy nor are they indicative of a recently strong economy. In South Africa’s case the JSE appears as an increasingly wealthy and irrelevant island, with its own hierarchy and rules, floating above an increasingly disorganised and poor economy.
The health of the JSE now appears to be linked far more to US monetary policy than to the performance of the South African – or even international – economy. Its most recent “record high” was reached as a result of indications that the US government will continue with its quantitative easing (QE) programme. Similarly, recent retreats have tended to be linked to signals that the US government intended to abandon its QE programme. QE was ostensibly designed to keep US interest rates low by making funds available in the hope of re-invigorating the real economy in the US but it quickly became an addictive source of funding for financial markets around the world.
Money from QE is pumping up the price of financials assets across the globe without necessarily having any direct impact on the real world. This inevitably means that the people who own lots of financial assets have become enormously wealthy as a result of the US government’s monetary policy. It probably ranks as the biggest government handout on record.
If the old-fashioned financial theories worked, then what could be expected to happen in the wake of these “record highs” on the JSE is that listed companies in South Africa would have rights issues.
But that is, of course, a terribly old-fashioned idea and ignores the reality that theses days the JSE, as with stock markets across the globe, is rarely used to raise capital to fund businesses.
Local analysts blame this entirely on the inability of the South African government to create a risk-free environment in which corporate executives will be able to thrive; an environment in which executives will be unhindered by real-life challenges such as a truculent workforce, a volatile currency and uncertain policy.
We are expected to believe that if executives of listed companies were presented with such an environment then they would invest billions of rand to realise the certain returns that would be generated in the medium to long term.
But thanks to the JSE it is much more rewarding for executives to continue with their totally risk-free strategy of not investing. Instead of putting money into new ventures they can extract profits from the investment activity of previous generations of managers and use these profits to pay out dividends or buy back shares. This risk-free harvesting strategy will do much to support the current share price. And the current share price is of critical importance to executives whose generous remuneration packages are packed with share options that can be exercised and sold any time between now and three years hence.
The risk-free harvesting strategy is also extremely attractive to institutional fund managers who invest in equities and whose fees are determined almost entirely by short-term share price performance.
In theory, given that institutional fund managers are acting on behalf of millions of ordinary workers and savers, all of those millions of ordinary people should also benefit from the JSE’s “record highs”. But in reality much of the benefit is lost to the huge fees that have to be paid to the increasing numbers of consultants who populate the fund management industry.
In addition, the reluctance to invest and the sloshing in and out of QE funds increases the casino-like aspect of the JSE, which makes the situation much more precarious for the millions of ordinary people who are not planning to cash in within the next three years.
Perhaps as the local stock market reaches ever-new highs it is time to consider undertaking a vigorous cost-benefit analysis of the JSE and identifying who gets the benefits and who lands up with the costs of this powerful island.