South Africa’s investment universe is a lot smaller than it was two decades ago when 484 companies were listed on the JSE vs the 302 registered in the first quarter this year. Over the same period, exchanges over in the US Germany and the UK have also gotten smaller as new listings have not kept up with exits. To unpack whether a shrinking JSE should make us worried, CNBC Africa is joined by Eugene Botha, Head of the Research Hive, Momentum Investments Group.
We begin first with South Africa's investment universe, which is a lot smaller than it was two decades ago when 484 companies were listed on the JSE vs the 302 registered in the first quarter this year. Over the same period, exchanges over in the US Germany and the UK have also gotten smaller as new listings have not kept up with exits. To unpack whether a shrinking JSE should make us worried, CNBC Africa is joined by Eugene Botha, Head of the Research Hive, Momentum Investments Group.' Eugene, thanks so much for your time. Should we be worried that the JSE is getting smaller and why? Yes, Fifi, thanks for having me. So first of all, I think South Africa's challenges are well known and there is definitely concern that the current delisting trend is a structural one, reflecting the state of the struggling local economy. And indeed, markets with high new listings activity typically have supportive economic growth and accommodating policy. But nonetheless, I think it's also a cyclical nature and we've seen that globally. So as you've mentioned, the UK, Germany, US, if you go back 20, 25 odd years and compare that to now, those markets have actually halved in terms of their number of listings as well. So in absolute terms, I mean, yes, you can't really compare them as the number of listings over there is in the thousands. But nonetheless, we've seen the shrinking universe globally and in South Africa, it's potentially a bit of a concern. But if we look at where those delistings have happened and how the structure of the market has actually changed, I don't necessarily think it's a huge concern. I think South Africans as investors in the South African market has been used to a very concentrated market for decades, forever, I guess. And if we look at where those delistings have actually happened, it's happened on the smaller and on the fledgling side of the listed companies and not necessarily on the way the larger companies are and what really is the investable universe for South African investors in the South African market. So, yes, it could become a concern, but currently not necessarily as big as we all think. So do you reckon it hasn't been too much of a concern for investors because the delistings haven't actually resulted in the JEC's market valuation getting smaller? In fact, over the same period, it's gotten larger. Correct. It's in fact true. So we've seen a lot of consolidation. So there's definitely a consolidation trend happening. So larger companies are taking up these smaller companies. But if we think about the market structure and what it looked like a couple of years ago compared to now, it's perhaps even a good thing. So the market is strong. I think there's good trends out of the market that we're seeing. So but maybe going back to if you look at the early 80s, early 90s and we look at the composition of the market, the top 10 companies within the JEC was resource companies. So that made up the full 10 percent of the listings, the top 10. Whereas if we look at it now, the resource sector only makes up about 40 percent of the top 10 in the industry. So therefore, it becomes a bit more concentrated. So the top 10 actually makes up about 70 percent of the index as a whole. But it's a lot more diverse. We see a single share like NASPA, it gives investors exposure to a vast portfolio of new economic ventures, even which is based outside of South Africa. So it gives, therefore, South Africans the opportunity to get exposure to international opportunities as well. Another statistic that caught my eye was the fact that there has been an increase in the number of foreign primary listings on the JEC from 4.3 percent to 20.4 percent. And I mean, I suppose you can throw in a whole host of reasons for that, a structural challenge with the economy not to batting to its potential, perhaps even a strategic reason from certain companies who want to perhaps tap a wider and deeper investment or capital pool elsewhere. But then we have also heard about some of the regulatory hiccups on the JEC in and of itself. So just talk to us about that and whether you reckon that trend is likely to continue with more companies having primary listings on foreign markets as opposed to here at home. So I think the first reason for companies doing that is to diversify their earnings base to global. So I mean, I guess the volatility that the local currency can actually bring to the earnings is a concerning one over the long term, especially. OK, we seem to have temporarily lost Eugene as he was just talking about the trend of foreign primary listings. And Eugene, I believe that you are back and you were just talking about the fact that you reckon that it's mainly motivated by companies wanting to tap larger funding pools, as it were. Yeah, correct. So sorry for that break in transmission. So I do think it's about diversifying the company's earnings as far as possible. And given the volatility that we can see from a RAND perspective and the volatility that can bring to local company earnings, especially if they do export their goods, is a concerning one. So therefore, companies do want to diversify their earnings. The other side of the coin is also the regulatory hurdles that companies do have to deal with or to list the companies onshore. And it's twofold. It's the complexity and cost. So the regulatory environment can be quite complex and costly for companies looking to list. Compliance with stringent regulations requires significant financial and administrative resources, which can be a deterrent for smaller companies. And then I guess it's also a very time consuming process. So the time required to meet all of these regulatory requirements can delay the listing process and making it less attractive for companies to seek access to capital through listing. Sure, which the JEC has been working on. I mean, we have seen them tweaking and amending some of their listing rules to make it easier for companies to onboard. And I suppose time will tell whether it has been effective or not. But what we also have seen, Eugene, over this time period is if you look at the private equity space and how companies exit in that arena, the JEC has not seemingly been the choice or the platform in which to exit. And I want to know what you reckon that is as a result of just maybe some of the T's and C's in terms of listing on the JEC or perhaps private equity players finding better value elsewhere? Yeah, so I definitely think the latter plays a big role. So private equity funding has been a lot more attractive than listing it on the exchange and getting funding for company expansion and innovation business expansions, I guess. But I do think that the stock exchange has made a couple of changes to their requirements from mid-2023, and they are aiming to make the market more attractive and accessible. So through whether it's dual class share structures where the JEC now allows dual class share structures which can help companies maintain control while raising capital, I think that will go a long way. Simplified financial reporting is definitely, you know, that has been quite a big burden for companies listing on the exchange. And it's now been simplified quite a bit to reduce that burden on companies. And then the other aspect is reduced free float requirements. So the minimum free float for new listings has been reduced. And that also makes it a lot easier for companies to list.
Theme: Shrinking JSE and the Impact on Investors
South Africa's investment universe has experienced a significant contraction over the past two decades. The Johannesburg Stock Exchange (JSE) has seen a decline in the number of listed companies, with only 302 registered in the first quarter of this year compared to 484 two decades ago. This trend of shrinking exchanges is not unique to South Africa, as markets in the US, Germany, and the UK have also witnessed a reduction in listings. Eugene Botha, Head of the Research Hive at Momentum Investments Group, joined CNBC Africa to discuss whether this trend should be a cause for concern. Botha acknowledged that while there are challenges facing South Africa, the delisting trend may reflect the struggling local economy. However, he also attributed part of the shrinkage to a cyclical nature seen globally. Despite the decline in listings, Botha emphasized that the concentration of delistings has occurred mainly among smaller and fledgling companies, rather than impacting the core investable universe for South African investors. The consolidation trend has seen larger companies absorbing smaller ones, leading to an overall increase in the JSE's market valuation. Botha noted that while the top 10 companies in the JSE were previously dominated by resource firms, the market has become more diverse, with a broader range of sectors represented. Companies like NASPA offer exposure to international opportunities, allowing South Africans to invest in a variety of ventures beyond the local market. Additionally, the percentage of foreign primary listings on the JSE has grown significantly, from 4.3% to 20.4%. Botha attributed this trend to companies seeking to diversify their earnings globally, mitigate currency volatility, and tap into larger funding pools. However, the regulatory environment and the complexity of listing requirements in South Africa have posed challenges for companies. Botha highlighted the burdensome nature of compliance with stringent regulations, which can be costly and time-consuming. In response, the JSE has made efforts to streamline its listing rules, including allowing dual class share structures and simplifying financial reporting to make the market more attractive and accessible to potential listings. In terms of private equity exits, the JSE has not been the preferred platform for companies looking to exit. Botha suggested that private equity funding has been more appealing than listing on the exchange due to better value propositions elsewhere. However, the JSE is implementing changes to enhance its market appeal, such as reducing free float requirements and simplifying financial reporting. These adjustments aim to make the exchange a more viable option for companies seeking capital through listings. While the shrinking JSE raises some concerns, Botha believes that the market's current structure and resilience reflect a shift towards a more consolidated and diverse market, offering investors new opportunities for growth and international exposure. As the JSE continues to adapt and refine its listing requirements, the exchange may attract a broader range of companies and reignite interest in domestic listings, potentially reversing the trend of shrinking markets.
"The Johannesburg Stock Exchange has seen a decline in the number of listed companies, with only 302 registered in the first quarter of this year compared to 484 two decades ago."
JSE, South Africa, investment, economy, markets, Johannesburg Stock Exchange, listings, delistings, regulatory environment, dual class share, financial reporting, private equity, market valuation, global diversification, currency volatility, funding pools, consolidation, growth opportunities, international exposure