Putting Massive JSE Error Into Perspective

25 July 2016 | Dwaine van Vuuren
 


A programming error at the JSE has caused the bourse to grossly misrepresent foreign sellers of SA equities as net buyers of R98.10bn worth of local stocks from May 2016 to July 20, 2016. Foreign investors appeared to be piling into South African equities as the JSE reported net purchases of South African equities by non-residents of R6.4 billion for May 2016, R63.8 billion for June 2016 and R27.9 billion for July 2016 to date. The reality of the situation is that instead of the reported R98.10bn in net purchases, there were actually net sales totaling R36.35bln over this period, a massive R134bn difference.

Foreign sales/purchases of local equities are followed closely by market analysts to gauge foreign appetite for South African shares. Net purchases often lend support to the local markets as well as the local currency. Many market commentators have attributed the apparent inflows to foreigners looking for high-yield securities in developing markets. It seems the reality is rather less optimistic (to the tune of R134bn) as foreign investors have not yet deemed the higher yields compensation enough for the risks inherent in investing in South Africa and we continue to see foreign money leaving our equity markets.

The JSE released a statement on Sunday, 24 July 2016, sighting "a programming error affecting the manner in which it extracts statistical data from its core transactional systems" as the root cause for the error. Upon realizing the error, the JSE said that it has taken immediate steps to correct the data and that they are considering additional measures to avoid a reoccurrence of the error in future. "The programming error was corrected on 21 July 2016 and daily reports received from 22 July 2016 are accurate as is the source data."

"We recognize the importance of this data to all stakeholders and apologize for the miscalculation", says Leanne Parsons, Director Information Services at the JSE.

The chart below shows the extent of the misrepresented data that investors normally use to gauge interest in our local equity market. Net purchases of shares by foreigners are calculated by taking total purchases of domestic equities by non-residents less total sales of domestic equities by non-residents to gain the net "sale" or "purchase" of local equities by foreigners. You can see from the chart that foreigners have been net sellers of SA equities since Sep 2015, almost a year ago:

image1

We normally like to examine net foreign purchases of equities (shares) and SA government bonds when gauging equity risk, and for the most part, net purchases of bonds are normally larger than equities. We have taken the combined total of equity and bond purchases pre and post the JSE revisions and displayed them below:

image2

This shows a slightly less bearish picture, since we are still at least in positive territory now, even after the revision to correct the erroneous net equity purchases number.

The net foreign share and bond purchases are actually one of the "12 signs of the Bear" that we track daily for our PowerStocks Research clients to measure equity market risk.

As you can see below, this outflow of money, represented by negative net foreign purchases of equities and bonds warned of the 2003 and 2008 bear markets:

image3

To summarize, the error in the JSE data has probably led to most market participants that use the non-resident purchases, to underestimate the real risks facing the JSE at the moment. Whilst a return to positive net purchases of shares and bonds is welcome for July, it is a whopping R134bn less than previously thought. This means the current rally, pressing the JSE to new all-time high P/E’s is not been driven by foreigners, but by locals. At some point, one would want to see foreign buying return to the JSE as this will render the current rally more sustainable.


Dwaine
Dwaine van Vuuren
Retail-side Research
RecessionAlertPowerStocks Research

Dwaine van Vuuren is a full-time trader, global investor and stock-market researcher. His passion for numbers and keen research & analytic ability has helped grow RecessionALERT.com (US based) and PowerStocks Research into companies used by hundreds of hedge funds, brokerage firms, financial advisers and private investors around the world. An enthusiastic educator, he will have you trading and investing with confidence & discipline.


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