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JSE delistings: does this spell trouble for SA investors?

‘While I am concerned in the short term, the capital markets and the public markets are really here for the long term, and the trend that we are seeing will turn around’: JSE CEO Dr Leila Fourie.

NOMPU SIZIBA: Today, May 4, 2021, we talk about JSE company listings and why there’s been a trend for companies to delist from the exchange and what the implications are. My colleague, Ryk van Niekerk, caught up with the CEO at the JSE.

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RYK VAN NIEKERK: The JSE is the 19th largest stock exchange in the world, and also the largest in Africa. It has a market capitalisation of around R17 trillion, which is more than three times the GDP of South Africa. But unfortunately the JSE has been under some pressure over the last decade or so, with the number of listings on the bourse dropping to around 340. This is nearly half the number of listings on the JSE in 2001.

According to research from BDO, there were approximately 32 delistings in 2017, another 17 in 2018, 24 in 2019, and around 20 last year. Several companies such as Anchor, Accentuate, Montauk, and Bell Equipment are also said to delist this year.

On the line is Dr Leila Fourie, the CEO of the JSE. Leila, thank you so much for joining me. How concerned are you about this trend?

LEILA FOURIE: Hi, Ryk. The trend that we’re experiencing is very much a global phenomenon. It’s not unique to South Africa or to the JSE, and it’s also a cyclical trend. So, while it’s never good to see the nominal number of listings drop, as you’ve just mentioned, one has to see the bigger picture. Firstly, the market cap last year increased by 2% and our all-share index is up year to date by 12%, which is quite different from the real economy and the global economy.

Part of that is a feature in the South African markets, which is that we have a number of very, very resilient and growth-oriented large single-name stocks. We also have a large number of dual-listed companies, companies that derive either all their income or a large part of their income ex South Africa, and that diversifies our exchange.

So, when you consider that we are, as you said, the 19th largest by market cap, we are the 33rd largest by GDP, which means that we punch way above our weight. That really points to the quality of stocks that we have on the exchange. So, while I am concerned in the short term, the capital markets and the public markets are really here for the long term, and the trend that we are seeing will turn around.

Some of the key drivers include the consolidation of stocks, large companies coming in and buying smaller companies, the role of private equity and the rise of alternative capital formation – and we are seeing that as a global phenomenon. And then the cyclicality. So it’s cheaper in the current market to raise debt than to raise equity. When the cycle turns, we will see that trend starting to change again.

RYK VAN NIEKERK: Leila, we have a very robust asset-management industry in South Africa; it includes pension funds, unit trusts and other collective investment schemes. But we also have regulations such as Regulation 28, which prescribes the asset allocation of these funds. With a shrinking JSE, the investment universe is also shrinking and several fund managers have alluded to this on this programme over the past few months. Have you had any interaction and discussions with the asset-management industry about this?

LEILA FOURIE: Where we’re seeing the investment landscape contracting is in the small- and medium-cap stocks, not in the Top 40. And typically largely the collective-investment schemes and the pension-fund investors are focused on the Top 40. We’ve seen those Top 40 stocks expanding and growing. So, yes, there is a very negative impact on the smaller and less liquid stocks, and that is a cyclical thing during a downturn and a crisis. The less liquid stocks tend not to be the focus of an investor’s portfolio because you can’t afford to be in a less liquid stock; you need to be able to trade out of your position quickly when the market turns.

We’re also seeing some really positive signs. As we saw a couple of years ago, when AB InBev bought SAB, they primary inbound-listed on the exchange. We’re seeing the same with Coca-Cola, which recently bought out Pioneer Foods and has now announced that it’s going to be listing the bottling company on the JSE. Those are very important global signals to global investors, and also very important for our local liquidity and the ability of our local pension-fund asset managers and investors to diversify their investment.

So yes, the investment world is reducing in the small caps. It’s a concern for the pipeline of new listings. I believe it will change when the cycle switches to one of growth. But, as I said earlier, this is a long-term game that we’re talking about, and the Top 40 stocks continue to grow.

RYK VAN NIEKERK: I think the investment performance is a totally different debate, because we have seen a significant improvement in the performance over the last six months.

We’ve seen some proposals from government to allow the inward listing of international exchange-traded funds, or funds invested in foreign assets, to allow the local industry to invest in those assets. Have you seen any interest from foreigners and South Africans to list these instruments on the JSE?

LEILA FOURIE: We’ve certainly seen an increase in ETFs, and ETNs, for that matter. ETNs were more than double over the last year. We are hoping that that exchange-liberational exercise does translate. It’s still under investigation and under discussion. The regulators are engaging the market. There were three exchange-control reforms that the JSE put forward. The one that you mentioned is the first one, the second is to accept non-cash collateral. Foreigners right now have to post rand collateral, which costs them money and exposes them to the rand. Also, enabling dollar-based listings on the exchange would open up our economy.

I don’t think that there is any one panacea to growing our economy. It would be an oversimplification. There are multiple complex dynamics at play, and it’s a function of firstly growing the real economy and, secondly, making business and trading much easier through exchange-control reform; potentially also through introducing new products like active ETFs – and we are hoping to conclude that process in the third quarter of this year. And then, thirdly, by putting a very powerful, unified and strong narrative forward to the global investor community, because liquidity drives listings. It’s a virtuous circle. If you don’t have trading, you’re not going to be able to attract capital raises.

RYK VAN NIEKERK: Thanks, Leila. I hope we see this cycle change quite quickly so that we can see a new generation of companies listing on the JSE. That was Dr Laila Fourie, the CEO of the JSE.

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You make good points, some of which I agree with.

Have you considered the exponential growth our economy at large experienced during the Mandela and Mbeki as they pursued (by-and-large) productive economic policies?

This is important because you mention the delisting of companies from 2017. Who took over after Mbeki I’m 2008? We have seen a dramatic decrease in our economy since Zuma and through to his wonderful Ramaphosa. Their BEE and land reform policies surely have contributed to the increase run delisting?

You talk of cycles and that we will recover, but some countries never do. I hope you are right.

The country is dead As* BROKE. It is riddled with HUGE corruption it promotes racism, jobs are handed to the connected, the BEE is a COMPLETE FAILURE, the state cannot protect it’s people and they have dumbed down the next and future generations. Truth Hurtz Doughnut Eish

“Punching above our weight” Would be interesting to know, how the increased cap is a function of P/E inflation comparable to actual nav?

End of comments.

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