South Africa: Empowerment on the exchange

Investment rates among black South Africans on the Johannesburg Stock Exchange (JSE) have held steady over the past 12 months, despite market fluctuations and uncertainty over the local and global economy. Burgeoning pension and trust fund investments could also see increasing participation rates in South Africa’s black capital markets in coming years.

According to a preliminary report commissioned by the JSE and released in early October, black South Africans hold at least 17% of the shares in the leading 100 companies listed on the exchange. Of this total, 8% are held directly, mainly through empowerment stakes, and the remaining 9% through mandated investments, like pension funds and unit trusts. With the JSE valued at around $775bn, this puts black ownership on the bourse at some $62bn.

However, the report – drafted by independent research house Chandler & Associates – says the true level of black ownership on the JSE could be far higher as almost one-third of listed companies have not yet had their share register assessed. When additional data becomes available, it could push black ownership rates above the 18% mark from last year.

Russell Loubser, the exchange’s chief executive officer, said it was vital for a country such as South Africa, which he described as undergoing an economic transformation, to have empirical data about black investment on the JSE.

“We believe that this research gives South Africa a basis from which black ownership can be measured in the future,” he said in a statement accompanying the report’s release. “With 32% of the equity yet to research, we believe that the ownership figure is actually understated. We also anticipate that the black economic interest will climb in future.”

The numbers stack up even better when it is considered that just 60% of shares traded on the JSE are available to ordinary South Africans under the study’s methodology. This is due to the exclusion of the 2% of shares held by the state and the treasury, a further 11% of shares deemed as cross holdings between listed entities, and the 27% of shares of foreign operations held by groups with offshore assets.

Using this method, the rate of holdings by black South Africans on the JSE lifts sharply, with 17% of 60% translating into 28% of all available shares, well in excess of the 25% ownership rate mandated under the Black Economic Empowerment (BEE) codes by 2017.

However, not all analysts are convinced the JSE’s figures are truly reflective of the situation. According to Ajay Lalu, the managing director of Black Lite Consulting, the JSE study may have overstated rather than understated black share ownership levels on the exchange.

“How much of that shareholding has actually vested in black hands unencumbered?” he asked local media. “A significant proportion of the 8% ownership is funded by financial institutions.”

Another to suggest unencumbered shareholding by black investors remained lower than believed was Lawrence Mavundla, the president of the National African Federated Chamber of Commerce (NAFCOC), with many of the holdings listed actually encumbered.

“The shares owned by black investors are mostly held by institutions, as most of them still owe banks,” Mavundla said the day after the JSE report came out.

While having long been a supporter of higher levels of black ownership on the JSE, NAFCOC has since changed its position, calling for the establishment of new industries and joint ventures rather than acquiring shares of existing firms, said Mavundla.

Whether or not latitude has been taken when interpreting direct ownership rates, one figure does stand out from the study: the findings of a similar report in 2010 showed direct investment levels at 8% – the same as this year. This suggests that, while there are increases in black ownership via pension funds and trusts, reflecting middle-class growth, efforts to promote direct share ownership have had less success.

The growing middle black class will become more economically powerful in the years to come, said Trevor Chandler, one of the report’s authors.

“By number, middle-class black South Africans are the main beneficiaries of mandated investment,” he said. “This is achieved with no gearing – pension funds, life insurance policies and collective investment schemes do not carry debt.”

Though direct black ownership rates have remained flat this year, a burgeoning middle class, which already has invested in the country’s capital markets, could in time also look increasingly towards the JSE as a vehicle for future investments. That potential trend would boost both black ownership rates and the market’s value significantly.