1 Presentation to CCA Conference Presentation to CCA Conference on on An Overview of African An Overview of African Capital Markets Capital Markets New York City, 26 February New York City, 26 February 2004 2004 Colin Coleman Colin Coleman Managing Director Managing Director Goldman Sachs International Goldman Sachs International
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1
Presentation to CCA Conference onPresentation to CCA Conference on
An Overview of African An Overview of African Capital MarketsCapital Markets
New York City, 26 February 2004New York City, 26 February 2004
Colin ColemanColin ColemanManaging DirectorManaging Director
Goldman Sachs InternationalGoldman Sachs International
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Overview of African Capital MarketsOverview of African Capital Markets
Africa in an Emerging Market PerspectiveAfrica in an Emerging Market PerspectiveComparative Market OverviewComparative Market Overview
Data as of 30 January 2003.Data as of 30 January 2003.
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Emerging Markets Fund Assets by GeographyEmerging Markets Fund Assets by Geography
In competing for the largest pool of investible capital, South African companies are competing primarily with Asian and In competing for the largest pool of investible capital, South African companies are competing primarily with Asian and South American companiesSouth American companies
During the last year, the Korean Won and the Taiwan Dollar has strengthened by 2% vs. the US dollar, the Brazilian Real During the last year, the Korean Won and the Taiwan Dollar has strengthened by 2% vs. the US dollar, the Brazilian Real 21% and the South African Rand 29% vs. USD21% and the South African Rand 29% vs. USD
In competing for the largest pool of investible capital, South African companies are competing primarily with Asian and In competing for the largest pool of investible capital, South African companies are competing primarily with Asian and South American companiesSouth American companies
During the last year, the Korean Won and the Taiwan Dollar has strengthened by 2% vs. the US dollar, the Brazilian Real During the last year, the Korean Won and the Taiwan Dollar has strengthened by 2% vs. the US dollar, the Brazilian Real 21% and the South African Rand 29% vs. USD21% and the South African Rand 29% vs. USD
(a)(a) As at December 2003.As at December 2003.
Assets by Country and RegionAssets by Country and Region Highest Weightings in MSCI Emerging Markets IndexHighest Weightings in MSCI Emerging Markets Index(a)(a)
Breakdown by CountryBreakdown by Country RankRank Security NameSecurity Name WeightWeight
Breakdown by RegionBreakdown by Region
11 SamsungSamsung 6.18%6.18%22 Anglo AmericanAnglo American 3.64%3.64%33 Taiwan SemiconductorsTaiwan Semiconductors 1.88%1.88%44 China Mobile China TeleChina Mobile China Tele 1.86%1.86%55 Teva Pharmaceutical IndTeva Pharmaceutical Ind 1.70%1.70%66 Telefonos Mexico Telefonos Mexico 1.49%1.49%77 Lukoil Holding (USD)Lukoil Holding (USD) 1.36%1.36%88 Kookmin BankKookmin Bank 1.35%1.35%99 America Movil America Movil 1.27%1.27%1010 Petrobras Petrobras 1.23%1.23%1111 PoscoPosco 1.12%1.12%1212 SasolSasol 1.01%1.01%1313 Petrobras Petrobras 0.98%0.98%1414 United MicroelectronicsUnited Microelectronics 0.88%0.88%1515 Surgutneftegaz Comn (USD)Surgutneftegaz Comn (USD) 0.87%0.87%1616 Petrochina Petrochina 0.81%0.81%1717 SK TelecomSK Telecom 0.81%0.81%1818 Standard Bank GroupStandard Bank Group 0.81%0.81%1919 Vale Do Rio Doce PnaVale Do Rio Doce Pna 0.79%0.79%2020 Hyundai MotorHyundai Motor 0.79%0.79%
TotalTotal 30.25%30.25%
Korea18.9%
South Africa13.6%
Taiwan13.4%
Mexico 7.9%Brazil 7.7%
China 7.0%
Malaysia 6.0%
Russia 4.9%
India 4.9%
E. Europe 3.1%
Other 12.6%
Asia54.0%
South America18.7%
Africa 14.2%
E. Europe (incl. Russia)8.0%
Middle East 5.1%
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South Africa: a Large and Concentrated Corporate SectorSouth Africa: a Large and Concentrated Corporate SectorTop Companies by Market Capitalisation and SectorTop Companies by Market Capitalisation and Sector
(a)(a) Not listed, GS estimate.Not listed, GS estimate.Source: Infocentre (excludes Lonmin $2.9bn and Xstrata $7.6bn) Source: Infocentre (excludes Lonmin $2.9bn and Xstrata $7.6bn) Note: As of January 2004 (7.01 ZAR/US$)Note: As of January 2004 (7.01 ZAR/US$)
Total Top 20 Companies Total Top 20 Companies 186.2186.2Total Market Capitalisation of JSETotal Market Capitalisation of JSE 215.8215.8% of total% of total 86%86%
Total Top 20 Companies Total Top 20 Companies 186.2186.2Total Market Capitalisation of JSETotal Market Capitalisation of JSE 215.8215.8% of total% of total 86%86%
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Analysing Country RiskAnalysing Country RiskComparative Default Swap Levels – 2003Comparative Default Swap Levels – 2003
South African CDS levels have undergone recent tightening, which is in South African CDS levels have undergone recent tightening, which is in line with higher rated sovereign creditsline with higher rated sovereign credits
Foreign Investor Performance Differs from Local Investor Foreign Investor Performance Differs from Local Investor PerformancePerformance
(a)(a) As at Dec-2003.As at Dec-2003.Source: DatastreamSource: Datastream
12M Index Performance (Local Currency)12M Index Performance (Local Currency) (a)(a) 12M Index Performance (USD Rebased)12M Index Performance (USD Rebased) (a)(a)
70%
90%
110%
130%
150%
170%
190%
210%
230%
250%
270%
Dec-2002 Apr-2003 Aug-2003 Dec-2003
Ind
exed
106%
39%
38%
19%8%6%
70%
90%
110%
130%
150%
170%
190%
210%
230%
250%
270%
Dec-2002 Apr-2003 Aug-2003 Dec-2003
Ind
exed
165%
27%
43%
19%
31%
50%
South African Investments have performed well from an international (USD based) perspective over the last yearSouth African Investments have performed well from an international (USD based) perspective over the last year 29% appreciation of ZAR vs. USD29% appreciation of ZAR vs. USD Investment decisions only driven by company specific issues to a certain extent, however macro issues are also very important Investment decisions only driven by company specific issues to a certain extent, however macro issues are also very important
from an international investor perspectivefrom an international investor perspective
South African Investments have performed well from an international (USD based) perspective over the last yearSouth African Investments have performed well from an international (USD based) perspective over the last year 29% appreciation of ZAR vs. USD29% appreciation of ZAR vs. USD Investment decisions only driven by company specific issues to a certain extent, however macro issues are also very important Investment decisions only driven by company specific issues to a certain extent, however macro issues are also very important
from an international investor perspectivefrom an international investor perspective
Europe STOXX 600 S&P 500 JSE All Share Mexico Bolsa Warsaw General Brazil Bovespa
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Currency Fluctuations are a Key Driver of Returns for Currency Fluctuations are a Key Driver of Returns for Foreign InvestorsForeign Investors
(a)(a) Goldman Sachs Research estimate of long-term over/under valuation of exchange rates.Goldman Sachs Research estimate of long-term over/under valuation of exchange rates.Source: Datastream, GS ResearchSource: Datastream, GS Research
ZAR vs. USDZAR vs. USD The Rand is Slightly Overvalued CurrentlyThe Rand is Slightly Overvalued Currently (a)(a)
5
7
9
11
13
15
17
Dec-1998 Mar-2000 Jun-2001 Sep-2002 Dec-2003
(70)%
(50)%
(30)%
(10)%
10%
30%
50%
70%
90%
1984 1987 1990 1993 1996 2000 2003
South African Rand Argentine Peso
Brazilian Real Mexican Peso
The Rand has shown substantial strength over the last year due to interest rate differentials and reversal of previous weaknessThe Rand has shown substantial strength over the last year due to interest rate differentials and reversal of previous weakness GS Research believe that the Rand is currently slightly overvalued but expect further strength in the short-term on the back of GS Research believe that the Rand is currently slightly overvalued but expect further strength in the short-term on the back of
weak US$ weak US$
The Rand has shown substantial strength over the last year due to interest rate differentials and reversal of previous weaknessThe Rand has shown substantial strength over the last year due to interest rate differentials and reversal of previous weakness GS Research believe that the Rand is currently slightly overvalued but expect further strength in the short-term on the back of GS Research believe that the Rand is currently slightly overvalued but expect further strength in the short-term on the back of
weak US$ weak US$
Dec-1998 to Dec-2001Dec-1998 to Dec-2001Dollar appreciates by Dollar appreciates by
112% vs. Rand 112% vs. Rand (rate Dec-2001: 14.44) (rate Dec-2001: 14.44)
Dec-1998 to Dec-2001Dec-1998 to Dec-2001Dollar appreciates by Dollar appreciates by
112% vs. Rand 112% vs. Rand (rate Dec-2001: 14.44) (rate Dec-2001: 14.44)
Dec-2001 to Dec-2003Dec-2001 to Dec-2003Dollar depreciates by Dollar depreciates by
46% vs. Rand 46% vs. Rand (rate Dec-2003: 6.42) (rate Dec-2003: 6.42)
Dec-2001 to Dec-2003Dec-2001 to Dec-2003Dollar depreciates by Dollar depreciates by
46% vs. Rand 46% vs. Rand (rate Dec-2003: 6.42) (rate Dec-2003: 6.42)
Emerging Markets Growth FundEmerging Markets Growth Fund USUS 17,95017,950843843 4.7%4.7%GMO Emerging Markets FundGMO Emerging Markets Fund USUS 3,2193,219342342 10.610.6Templeton Developing Markets TrustTempleton Developing Markets Trust USUS 2,0492,049109109 5.35.3Templeton Instl. Funds Emerging Mkts. SeriesTempleton Instl. Funds Emerging Mkts. Series USUS 1,7191,7199191 5.35.3Vanguard Emerging Markets Stock Index FundVanguard Emerging Markets Stock Index Fund USUS 1,2601,260127127 10.110.1Batterymarch Global Emerging Markets FundBatterymarch Global Emerging Markets Fund LuxembourgLuxembourg 1,1111,1117777 7.07.0UBS Equity Fund UBS Equity Fund SwitzerlandSwitzerland 1,0451,0458686 8.38.3SEI Institutional International SEI Institutional International USUS 9359359090 9.69.6ABN AMRO Funds Global Emerging Markets Equity FundABN AMRO Funds Global Emerging Markets Equity Fund LuxembourgLuxembourg 9199195454 5.95.9Schroder Emerging Markets FundSchroder Emerging Markets Fund UKUK 9149147373 8.0%8.0%
Equity Assets Equity Assets AUM in South Africa AUM in South Africa % of % of Fund NameFund Name CountryCountry ($m)($m) ($m) ($m) TotalTotal
10 Largest Emerging Market Funds Globally10 Largest Emerging Market Funds Globally
As in most times of volatile or declining equity markets, emerging market funds have been experiencing net outflows as a result As in most times of volatile or declining equity markets, emerging market funds have been experiencing net outflows as a result of increased investor risk aversionof increased investor risk aversion
Investor selectivity is increasing and only funds that invest in widely believed growth stories experience inflowsInvestor selectivity is increasing and only funds that invest in widely believed growth stories experience inflows
As in most times of volatile or declining equity markets, emerging market funds have been experiencing net outflows as a result As in most times of volatile or declining equity markets, emerging market funds have been experiencing net outflows as a result of increased investor risk aversionof increased investor risk aversion
Investor selectivity is increasing and only funds that invest in widely believed growth stories experience inflowsInvestor selectivity is increasing and only funds that invest in widely believed growth stories experience inflows
RankRank InstitutionInstitution $m$m % of Total% of Total $m$m % of Total% of Total
Overview of Top South African InvestorsOverview of Top South African Investors
(a)(a) As at Dec-2003.As at Dec-2003.Source: CarsonSource: Carson
South African EquitySouth African Equity(a)(a) Non-South African EquityNon-South African Equity
Majority of investors in South Africa are heavily weighted in South African equity, largely due to exchange controlsMajority of investors in South Africa are heavily weighted in South African equity, largely due to exchange controls Majority of investors in South Africa are heavily weighted in South African equity, largely due to exchange controlsMajority of investors in South Africa are heavily weighted in South African equity, largely due to exchange controls
The Emerging Market continues to enjoy strong technical support with increasing investor demandThe Emerging Market continues to enjoy strong technical support with increasing investor demandThe Emerging Market continues to enjoy strong technical support with increasing investor demandThe Emerging Market continues to enjoy strong technical support with increasing investor demand
Longer Term Perspective on Emerging Market PerformanceLonger Term Perspective on Emerging Market PerformanceRelative Emerging Market Indices: 1995 to PresentRelative Emerging Market Indices: 1995 to Present
Source: FactsetSource: FactsetAs at Dec-2003As at Dec-2003
Since Since Jan-1996Jan-1996
Since Since Jan-1999Jan-1999
Since Since Jan-2003Jan-2003
389.5 332.5 229.5
96.7 (36.8) 39.3
88.0 (99.7) 12.0
22.5 (49.0) 14.3
(9.3) 21.9 15.6
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Largest South African Companies’ Listings Largest South African Companies’ Listings 15 Largest by Market Cap from JSE Top 40 Tradeable Index15 Largest by Market Cap from JSE Top 40 Tradeable Index
11 Anglo AmericanAnglo American 33.2 33.2 YesYes OTCOTC LSELSE
RankRank CompanyCompany Market Cap ($bn)Market Cap ($bn) PLC?PLC? ADR?ADR? OtherOther PrimaryPrimary
A significant portion of the largest South African companies have already pursued listings A significant portion of the largest South African companies have already pursued listings abroadabroad
A significant portion of the largest South African companies have already pursued listings A significant portion of the largest South African companies have already pursued listings abroadabroad
US and European markets are trading at substantially higher valuation multiplesUS and European markets are trading at substantially higher valuation multiples Even within the mining industry, South African companies seem to trade at a discount to US peersEven within the mining industry, South African companies seem to trade at a discount to US peers
US and European markets are trading at substantially higher valuation multiplesUS and European markets are trading at substantially higher valuation multiples Even within the mining industry, South African companies seem to trade at a discount to US peersEven within the mining industry, South African companies seem to trade at a discount to US peers
The JSE is small and relatively illiquid in international termsThe JSE is small and relatively illiquid in international terms The JSE is small and relatively illiquid in international termsThe JSE is small and relatively illiquid in international terms
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The Index IssueThe Index Issue
The South African market is small in a global contextThe South African market is small in a global context Very little assets are tracking indices where South African companies can be includedVery little assets are tracking indices where South African companies can be included
The South African market is small in a global contextThe South African market is small in a global context Very little assets are tracking indices where South African companies can be includedVery little assets are tracking indices where South African companies can be included
Note: Highlighting denotes possible inclusion of South African companies.Note: Highlighting denotes possible inclusion of South African companies.
MSCI World Index WeightsMSCI World Index Weights Passive Index TrackingPassive Index Tracking
% Passively % Passively HeldHeld
Est. Passive Est. Passive Tracking ($bn)Tracking ($bn)IndexIndex
Europe – RegionalEurope – RegionalFTSE All ShareFTSE All Share 165165 9.399.39MSCI UKMSCI UK 2828 2.012.01DAXDAX 1414 3.233.23CAC 40*CAC 40* 9 9 1.261.26EuropeEuropeMSCI Europe ex UKMSCI Europe ex UK 4141 1.951.95Euro STOXX 50*Euro STOXX 50* 2828 1.811.81FT Europe ex UK**FT Europe ex UK** 1919 0.820.82STOXX50*STOXX50* 8 8 0.300.30USAUSAS&P 500S&P 500 770 770 7.487.48S&P SMALLCAPS&P SMALLCAP 13 13 3.693.69S&P MIDCAPS&P MIDCAP 2424 2.962.96RUSSELL 2000RUSSELL 2000 2121 2.772.77RUSSELL 3000RUSSELL 3000 185185 1.651.65GlobalGlobalMSCI EAFEMSCI EAFE 165 165 3.253.25FTSE PacificFTSE Pacific 20 20 1.011.01MSCI KokusaiMSCI Kokusai 5050 0.350.35MSCI WorldMSCI World 15 15 0.130.13MSCI World ex AustraliaMSCI World ex Australia 1515 0.130.13
1.1. USAUSA 14,173.014,173.0 55.23 55.23
2.2. JapanJapan 2,953.12,953.1 11.51 11.51
3.3. United KingdomUnited Kingdom 2,425.82,425.8 9.44 9.44
4.4. EuronextEuronext 2,076.42,076.4 8.09 8.09
5.5. GermanyGermany 1,079.01,079.0 4.20 4.20
……
9.9. Hong KongHong Kong 662.3662.3 2.58 2.58
12.12. TaiwanTaiwan 310.6310.6 1.21 1.21
13.13. ChinaChina 306.4306.4 1.19 1.19
19.19. BrazilBrazil 231.1231.1 0.90 0.90
20.20. South AfricaSouth Africa 215.8215.8 0.84 0.84
TotalTotal 23,030.923,030.9 100.00 100.00
Weight (%)Weight (%)Market Cap Market Cap
($bn)($bn)CountryCountry
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Benchmarking Benchmarking
MarketMarket AdditionalAdditional No. of No. of CompanyCompany Cap ($bn)Cap ($bn) Listing(s)Listing(s) Research AnalystsResearch Analysts
Liberty GroupLiberty Group 2.12.1 ADR (OTC)ADR (OTC) 77
Friends ProvidentFriends Provident 4.84.8 88
SkandiaSkandia 4.94.9 1010
Similar companies abroad tend to have a higher research followingSimilar companies abroad tend to have a higher research following Smaller difference for South African companies with ADR listings Smaller difference for South African companies with ADR listings
Similar companies abroad tend to have a higher research followingSimilar companies abroad tend to have a higher research following Smaller difference for South African companies with ADR listings Smaller difference for South African companies with ADR listings
Goal is to appear in more investors’ “investible universe”Goal is to appear in more investors’ “investible universe” Leads to more diversified investor base, and increased demand tensionLeads to more diversified investor base, and increased demand tension
Goal is to appear in more investors’ “investible universe”Goal is to appear in more investors’ “investible universe” Leads to more diversified investor base, and increased demand tensionLeads to more diversified investor base, and increased demand tension
Pursuing additional listings allows and facilitates for foreign investors to Pursuing additional listings allows and facilitates for foreign investors to invest in South African companiesinvest in South African companies
— Average size of top 100 South African investors is $104m compared to Average size of top 100 South African investors is $104m compared to $48.6bn for US and $10.0bn for UK investors$48.6bn for US and $10.0bn for UK investors
— Median size of top 100 South African investors is $12m compared to Median size of top 100 South African investors is $12m compared to $27.9bn for US and $4.5bn for UK investors$27.9bn for US and $4.5bn for UK investors
— Furthermore, there are approximately 20 investors in South Africa with Furthermore, there are approximately 20 investors in South Africa with over $100m in AuM, compared to 1,752 in the US and 341 in the UKover $100m in AuM, compared to 1,752 in the US and 341 in the UK
Even if majority of liquidity might remain in home market, foreign listing Even if majority of liquidity might remain in home market, foreign listing improves international capital markets profileimproves international capital markets profile
““Stamp of approval” if complying with more stringent reporting requirementsStamp of approval” if complying with more stringent reporting requirements
Possibility of increased trading hours per dayPossibility of increased trading hours per day
Source: TF/CarsonSource: TF/Carson
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Exchange Control Regulatory Changes – for South African Exchange Control Regulatory Changes – for South African Companies Companies Pursuant to February 2004 Budget ReviewPursuant to February 2004 Budget Review
Proposed ChangeProposed Change Net ImpactNet Impact
No changes were announced to existing No changes were announced to existing system whereby retirement funds and system whereby retirement funds and investment managers are permitted to hold investment managers are permitted to hold only 15% of total assets in foreign only 15% of total assets in foreign investments, and unit trust 20%. However a investments, and unit trust 20%. However a task team is set to review these limitstask team is set to review these limits
South African companies remain able to use South African companies remain able to use local cash leverage reserves to buy foreign local cash leverage reserves to buy foreign assets for up to R1bn outside Africa and up to assets for up to R1bn outside Africa and up to R2bn in AfricaR2bn in Africa
In addition to the above they are now In addition to the above they are now permitted to finance up to 20% (formerly 10%) permitted to finance up to 20% (formerly 10%) of the excess cost of approved foreign direct of the excess cost of approved foreign direct investments from South African fundsinvestments from South African funds
Permissable repayment of offshore capital Permissable repayment of offshore capital commitments will be measured to the greater commitments will be measured to the greater of R1bn ( or R2bn in case of and African of R1bn ( or R2bn in case of and African Investment) or 20% of total outstanding Investment) or 20% of total outstanding commitment in any given yearcommitment in any given year
Most fund mangers in South Africa have long Most fund mangers in South Africa have long ago approached these limits:ago approached these limits:
Limiting ability to take up additional Limiting ability to take up additional foreign paper as a result of M&A activityforeign paper as a result of M&A activity
Restrictions on use of domestic cash/funds Restrictions on use of domestic cash/funds remainremain
Slight relaxation of use of domestic Slight relaxation of use of domestic cash/funds but still leaving large need for cash/funds but still leaving large need for foreign raised funds for larger acquisitionsforeign raised funds for larger acquisitions
Dual/Secondary/ADR listings important Dual/Secondary/ADR listings important means to raise off shore capitalmeans to raise off shore capital
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Exchange Control Regulatory Changes – for International Exchange Control Regulatory Changes – for International Investors/Companies Investors/Companies Pursuant to February 2004 Budget ReviewPursuant to February 2004 Budget Review
Proposed ChangeProposed Change Net ImpactNet Impact
Foreign companies can now be admitted to list Foreign companies can now be admitted to list on the Johannesburg Stock Exchange on the Johannesburg Stock Exchange allowing them to raise domestic equity and allowing them to raise domestic equity and debt capital and to use stock in acquisitions debt capital and to use stock in acquisitions
Local borrowings of majority (>75%) foreign Local borrowings of majority (>75%) foreign owned entities has increased from 100% to owned entities has increased from 100% to 300% of their total shareholder investment 300% of their total shareholder investment (equity or shareholder loans from abroad) (equity or shareholder loans from abroad)
Inward listing by African companies, Inward listing by African companies, institutions and government should be institutions and government should be encouraged through special allowance for encouraged through special allowance for institutional investors to invest up to an institutional investors to invest up to an additional 5% of their total retail assets in additional 5% of their total retail assets in African Securities listed on the JSE African Securities listed on the JSE
Ability to raise up to 75% of total Ability to raise up to 75% of total consideration locally through debt finance consideration locally through debt finance significantly reduces currency risk of South significantly reduces currency risk of South Africa investmentsAfrica investments and provides flexibility in and provides flexibility in acquisition consideration mixacquisition consideration mix
Ability to list locally further facilitates using Ability to list locally further facilitates using highly rated international paper to make local highly rated international paper to make local acquisitions acquisitions
Clarity needed on extent of local fund Clarity needed on extent of local fund managers ability to hold locally listed foreign managers ability to hold locally listed foreign stocks .stocks .