October 15, 2021

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

The Johannesburg Inventory Change continues to face questions round its shrinking measurement, with an additional two delistings – CSG Holdings and Alaris – introduced on Monday (11 October).

The variety of corporations listed on the JSE has decreased from 776 to simply over 330 previously 30 years, with over 14 corporations delisting yearly on a web common foundation. Knowledge printed by Bloomberg exhibits that 21 corporations had already delisted in 2021 to September.

This has spurred market commentators to debate the JSE’s ‘slow death’ within the context of a struggling native economic system, with many arguing that investors ought to take their cash 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,” mentioned Nadia Van der Merwe, senior supervisor at Allan Grey.

Contemplating the overall variety of listings on the JSE, a lot of the decline over the past 20 years occurred throughout the early 2000s, pushed by a excessive variety of delistings mixed with few new corporations coming to market.

The variety of listings subsequently stabilised and remained broadly fixed from 2004 to 2016. Since then, fewer new corporations have come to market, whereas delistings stay at broadly related ranges, mentioned Stephan Bernard, supervisor at Allan Grey.

“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 mentioned.

“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 corporations into bigger listed companies 

In keeping with what is occurring with the JSE, a world pattern is the consolidation of corporations into bigger listed companies.

“The variety of listings might have declined, however the common listed firm is considerably bigger at present than it was 10, 20 or 30 years in the past, 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,” mentioned Bernard.

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

Smaller corporations delisting

Bernard mentioned that the downward pattern within the variety of firm listings over the previous decade is primarily a results of delistings amongst small companies that fall outdoors the typical asset supervisor’s acceptable measurement and liquidity vary.

“The market capitalisation of new listings has exceeded that of delistings every year since as far back as 2008,” says Bernard, including that the variety of corporations with market capitalisations above R5 billion (in 2021 rand worth) has elevated 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.”

Main delistings embody Clover, Pioneer Meals, 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,” mentioned Van der Merwe.

World phenomenon

JSE chief government Leila Fourie has acknowledged a few of the criticisms about delistings but additionally famous that South Africans are ‘congenitally negative’.

In an interview with the Mail and Guardian in June, Fourie mentioned that the delisting spate can also be a world phenomenon and isn’t uniquely native.

The financial downturn triggered by Covid-19 precipitated a number of corporations, significantly ones with smaller market capitalisation, to lose investor assist and, in the end, need to delist, she mentioned.

“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.”

Nonetheless, Fourie has raised considerations in regards to the capital outflows from South Africa, which have steadily elevated over the previous couple of years.

In a written submission to parliament on Treasury’s new tax payments in August, the JSE mentioned South Africa’s macro setting has deteriorated over the previous 5 years. All three international score companies lowered their rankings of South Africa’s sovereign credit score standing in 2020.

Fourie advised BusinessDay that South Africa must do extra to make an funding case for the nation. “I sleep very well normally, but if something were to steal my sleep from me, it would be foreign flows,” she mentioned.

“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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