Giant investment banks are exiting South Africa - but one analyst thinks they may be bailing at the bottom
- Arqaam Capital is the latest international investment bank to leave South Africa.
- Credit Suisse left last year, and others like Macquarie and Deutsche Bank have been scaling down their operations amid a weak and quiet local stock market.
- But FNB's Wayne McCurrie thinks they may be bailing out at the bottom of the market.
- For more stories, go to Business Insider's home page.
Some of the world’s biggest investment banks are leaving or scaling down their operations in SA. But one analyst thinks they may be bailing out at the bottom.
This week, the Dubai-based investment bank Arqaam Capital became the latest global investment bank to close its South African office, Bloomberg reported. Last year, the Swiss giant Credit Suisse pulled out of South Africa after more than a decade in the country
Others have scaled down their local businesses. Recently, the Australian multinational financial services group Macquarie decided to exit its cash equities business (primarily sales and research) in the country.
Deutsche Bank has also scaled down its South African business, while Citigroup is not filling some of its equity research positions, Business Day reported last month.
“Profit margins for equity-trading companies that offer research have been squeezed in South Africa and other markets by the cost of MIFid II regulations (new rules instituted by the European Union), as well as a shift toward passive investing and a fall in trading volumes,” Bloomberg noted.
The JSE has seen trading decline at a disconcerting rate this year. According to the bourse’s statistics, the value of trading in the last week of November was more than 20% smaller than a year ago.The number of trades halved in that time.
So far this year, more than twenty companies have delisted from the bourse, while large companies like Sibanye Gold is eyeing primary listings on overseas markets.
The local market has also been underperforming. Since mid-2014, the JSE has delivered a total return of 5% per year, says Wayne McCurrie of FNB Wealth and Investments. This means that shares have not beat inflation and cash investments. “Returns from other international markets (the USA in particular) have been significantly higher (around 12% p.a.) and also significantly higher than inflation,” McCurrie says. The weak returns in South Africa have encouraged investors to invest overseas, further reducing the demand for local assets.
Investment banks are dependent on a vibrant equity market, as they make money from underwriting new listings and other financial transactions, as well as from stockbroking and conducting research on shares for investment recommendations
McCurrie says the exodus of global investment banks is primarily due to the “hopefully cyclical” lower returns from the local stock market.
“We have experienced a sharply deteriorating growth profile since 2012. The initial period of this decline (2012 to 2015) was probably due to the very poor commodity market. The second part of this time period was primarily self-inflicted, for all the reasons we well know.
“While the future is always unknown, we are of the opinion that the SA situation can improve off this low base. Not that SA will soon be on a high growth path, but just that the economic situation will improve.” This should bolster the market.
“Therefore participants exiting this market could be doing so at the bottom.”
But, McCurrie cautions that if the economy does not recover, the exodus will most likely continue.
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