Africa’s largest stock exchange, the JSE, has shed more than R2-trillion in market capitalisation since 2022 with delistings, foreign capital flight, geopolitics, low valuations and a weak economy flagged as some of the reasons behind the decline.
The annual report published last week by JSE Ltd, which operates the exchange, shows the bourse had a market capitalisation of R21.34-trillion in 2022, but this had been reduced to R19-trillion by the end of the 2023 financial year.
This translates to a loss of about R2.3-trillion in market value in a year. The 137-year-old bourse has been hit by a spate of delistings, dwindling trade volumes and low valuations.
The weaker domestic equities market performance reflects a higher domestic exposure to resources, which experienced significant weakness during 2023 due to lower global prices.
SA capital markets tend to be influenced by local and global macroeconomic and geopolitical challenges. This often manifests as higher volatility and less liquidity for equity markets.
The annual report lists several trends that have disrupted traditional financial market infrastructure business models. These include the emergence of more capital-raising mechanisms outside public markets, higher levels of volatility and less liquidity for equity markets, and risk-off sentiment, which drives capital towards perceived safe-haven jurisdictions.
A preference for fixed-income securities and updated limits under Regulation 28 of the Pension Funds Act, which allow higher foreign allocation, are also flagged as some of the issues the domestic equities market has to contend with.
Diversifying revenue
Asset allocators have increasingly deployed capital offshore after SA retirement funds were given the green light to increase their offshore allocations to 45% from 30%, with the local bourse immediately feeling the impact.
The operator of the JSE has over the past five years been ramping up efforts to diversify its revenue streams.
The company’s results for the year ended December show nontrading revenue now accounts for 36.8% of revenue, up from 29% in 2019. The decline in trading volumes comes while the JSE is struggling to stem the delisting trend, which has caused the bourse to halve in size over the past two decades.
The JSE’s results also show that equity value traded fell 9.5%.
The lack of liquidity and spike in outflows of capital from SA were raised at the AGM of asset manager Coronation in February.
JSE chair Phuthuma Nhleko in his letter to shareholders said the global exchange industry was undergoing a “difficult and transformational period” and the JSE was no exception.
“Exchanges operate in an environment that is not conducive to initial public offerings, and the market is highly competitive in the area of investment flows and trading activities … while the JSE faces the challenges typical of an exchange, our prospects and performance is symbiotic with, and affected by, SA’s overall economic prospects,” Nhleko said.
“There is still strong international investor interest in SA. These investors are concerned about SA’s policies and the pace of regulatory reform, including regulation about the ease of exiting SA. Here, we are providing input to our regulators on how to create an enabling environment for foreign investment.”
Attracting clients
The exchange has turned its focus to attracting new clients to the secondary markets, particularly from Europe and Asia.
“We also continue to concentrate on attracting new clients through product innovation and enhancing our regulatory environment to create a more attractive capital-raising destination,” CEO Leila Fourie said in a note to shareholders.
“We expanded our list of approved and accredited exchanges. Hong Kong Exchanges and Clearing (HKEX) joined the list of approved exchanges in 2023. HKEX-listed companies are now able to pursue a secondary listing on the JSE and qualify for a fast-track listing process. This streamlines the dual-listing process, leveraging the extensive market information available for these companies in their primary markets.”
The steep decline in the JSE’s market capitalisation could have been worse had BHP decided to ditch the bourse when it undertook a share consolidation in 2022. BHP, worth R2.7-trillion on the JSE, decided to retain its secondary listing on the JSE, instead of taking it to London.
More than 20 companies were delisted from the share market in 2022 for various reasons, which included mergers & acquisitions.
The JSE’s CFO, Fawzia Suliman, said overall there was a shift in capital flows as local investors sought foreign assets and global investors reduced their SA exposure.
“Looking ahead, the team will continue to focus on prudent management of the cost base and enhancing the control environment through several initiatives, including automation efforts,” Suliman said.
“Our long-term strategic objectives are to grow and diversify revenue streams, invest in operational robustness and resilience, and further entrench sustainability in the business.”
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