South Africa’s shrinking JSE – investors explain what’s going on

The Johannesburg Stock Exchange continues to face questions around its shrinking size, with a further two delistings – CSG Holdings and Alaris – announced on Monday (11 October).

The number of companies listed on the JSE has decreased from 776 to just over 330 in the past 30 years, with over 14 companies delisting every year on a net average basis. Data published by Bloomberg shows that 21 companies had already delisted in 2021 to September.

This has spurred market commentators to discuss the JSE’s ‘slow death’ in the context of a struggling local economy, with many arguing that investors should take their money and run.

“There is cause for concern when a net delistings trend emerges over time. This could be symptomatic of a faltering economy and persistent negative business sentiment. Still, there are several other factors at play,” said Nadia Van der Merwe, senior manager at Allan Gray.

Considering the total number of listings on the JSE, much of the decline over the last 20 years occurred during the early 2000s, driven by a high number of delistings combined with few new companies coming to market.

The number of listings subsequently stabilised and remained broadly constant from 2004 to 2016. Since then, fewer new companies have come to market, while delistings remain at broadly similar levels, said Stephan Bernard, manager at Allan Gray.

“Over the past 30 years, we have experienced three major cycles of new listings, each driven by a specific sector. While elevated markets should generally boost listings across sectors, there are often specific sectors characterised by conspicuous optimism,” Bernard said.

“It is unsurprising that in the late 1990s, at the height of the tech boom, technology companies comprised a significant portion of new listings. During 2006 and 2007, in the build-up to South Africa hosting the 2010 FIFA World Cup, it was the construction sector. For most of the 2010s – the glory days of listed property – real estate listings were plentiful.”

Consolidation of companies into larger listed corporations 

In line with what is happening with the JSE, a global trend is the consolidation of companies into larger listed corporations.

“The number of listings may have declined, but the average listed company is significantly larger today than it was 10, 20 or 30 years ago, even after adjusting for inflation.

“The total market capitalisation has increased significantly over time, and it is fair to say that the decreasing number of listings does not necessarily signify a weaker market,” said Bernard.

Van der Merwe illustrates this by explaining that in 1982, there were 93 companies listed in the mining sector, 45 of which were individually listed gold mines. “Today, only seven locally listed gold miners exist – all owners of a portfolio of mines.”

Smaller companies delisting

Bernard said that the downward trend in the number of company listings over the past decade is primarily a result of delistings among small businesses that fall outside the average asset manager’s acceptable size and liquidity range.

“The market capitalisation of new listings has exceeded that of delistings every year since as far back as 2008,” says Bernard, adding that the number of companies with market capitalisations above R5 billion (in 2021 rand value) has increased over time – from 83 in 2000 to 113 in 2010, and 121 in 2021.

“This suggests that the investment universe for larger investors has actually expanded over time. Drilling down one further layer, many of the more prominent delistings of recent years have been for reasons that suggest value and confidence in future returns, rather than because of businesses failing.”

Major delistings include Clover, Pioneer Foods, Assore and Comair.

“All but Comair were takeovers or management buyouts, indicative of the attractive levels at which many of the shares on our market trade. News that Heineken is considering the acquisition of Distell and Standard Bank’s intent to buy out Liberty are further supporting examples,” said Van der Merwe.

Global phenomenon

JSE chief executive Leila Fourie has acknowledged some of the criticisms about delistings but also noted that South Africans are ‘congenitally negative’.

In an interview with the Mail and Guardian in June, Fourie said that the delisting spate is also a global phenomenon and is not uniquely local.

The economic downturn triggered by Covid-19 caused several companies, particularly ones with smaller market capitalisation, to lose investor support and, ultimately, have to delist, she said.

“You will always have smaller companies wanting to cash out on an exchange. And you will always have large entities wanting to raise capital for large capital investment.”

However, Fourie has raised concerns about the capital outflows from South Africa, which have steadily increased over the last few years.

In a written submission to parliament on Treasury’s new tax bills in August, the JSE said South Africa’s macro environment has deteriorated over the past five years. All three global rating agencies lowered their ratings of South Africa’s sovereign credit standing in 2020.

Fourie told BusinessDay that South Africa needs to do more to make an investment case for the country. “I sleep very well normally, but if something were to steal my sleep from me, it would be foreign flows,” she said.

“I am concerned about the disinvestment from South Africa, and I think as a country we need to do more to put out a positive narrative and to start to create a coalition of the willing between the public and private sector to try and crowd in more financial support and more inbound investment.”

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South Africa’s shrinking JSE – investors explain what’s going on