In a keynote speech at the Johannesburg Stock Exchange (JSE) South Africa (SA) Trade Connect 2024 conference, James Baugh, managing director, head of European market structure at TD Cowen, kicked off by highlighting that market structure and liquidity dynamics in South Africa mirror those felt in other markets and in particular, Europe.
Baugh pointed out that South Africa has not been immune to macro issues impacting other financial markets and that notably, last year’s rebalance of the MSCI emerging markets index and the reduction of South Africa’s weighting led to an increase in sales of South African securities by international investors.
Brokers and nonresident brokers with access to international markets were noted by Baugh to have been increasingly sourcing liquidity in dual listed names offshore. This is occurring in markets that either offer greater liquidity and lower implicit costs relative to the local market in South Africa, he argued.
“They then go on to sell onshore to their domestic clients, which has also given the impression of a sell off, when in fact this is actually driven by local demand for these dual listed securities,” said Baugh.
In the keynote, Baugh re-emphasised that changes in market dynamics are not very different to those seen in Europe. This was credited not only to ever present macro conditions, but also to the interconnected nature of the two markets.
“Liquidity has been increasingly hard to come by,” stressed Baugh. “The daily turnover cash equities in value terms is down 10% across both regions in 2023. If you just measure intraday onward liquidity, the decline has been even more acute.”
Baugh highlighted the need for collaboration to ensure the whole market can adapt to difficulties in sourcing liquidity – collaboration being a huge discussion point at the conference so far.
With connection to agency brokers, Baugh also discussed opportunities to differentiate smaller businesses from larger players.
“Your ability to navigate complex and fragmented markets while outperforming competitors can set you apart from others, particularly when liquidity or at least like-minded liquidity is increasingly hard to come by,” he said.
“And to that point, it’s not even about accessing all liquidity all of the time. It’s about being thoughtful, targeting the right liquidity at the right time in order to achieve those objectives as set out by your clients.”