SA’s capital markets are sick, some say terminally. But the JSE’s AGM and a conversation I had recently with CEO Leila Fourie offers hope that we are starting to talk about the problem in a way that will, at the very least, help identify the correct treatment.
But first some numbers. I owe Paul Miller of AmaranthCX, a boutique corporate finance house, for doing the leg work on these. In the past 30 years the number of listed companies in SA has more than halved, from 760 to about 330. Worryingly, the trend appears to be gaining momentum. No fewer than 25 delistings occurred in 2021 (with just seven new listings in the same period) and at least a further 22 delistings are already anticipated for 2022 — and we’re only midway into the second quarter.
Fourie acknowledged the problem and quickly proceeded to trot out similar delisting numbers in exchanges in Europe. “There is a contraction globally of listings,” says Fourie. “Luxembourg is down 55% in number of listings in 10 years, Deutsche Bourse is down 36%, the Swiss and LSE [London Stock Exchange] group are down 22% and 21%.”
In SA we have our own internal dynamic that is driving things. Valuations are low. Debt is cheaper to raise than equity in terms of funding, and local tech sector companies are opting to stay private for longer. There is a drive towards private equity globally, and the nature of our market is institutionalised and does tend to skew more towards the large caps than the small and medium enterprises sector.
That last point is especially important and requires an independent inquiry into the structure of the market to determine how to best level the playing fields between the big institutions that comprise the Association for Savings & Investment SA and the retail investor.
Retail interest
Let’s face it, it’s not like ordinary South Africans are lacking for motivation. Luno, a single crypto trading platform, claims five times more (2.2-million) individual SA participants than the JSE has individual broker dealing accounts (452,000) across all of its authorised stockbrokers.
One wonders whether the JSE has done any analysis to understand why this obvious direct retail interest in trading, and digital trading in particular, has not been directed to the exchange. “We are attacking this from three areas,” said Fourie, “firstly positioning SA globally, secondly policy and tax reform — things like exchange controls — and thirdly, directly looking at enabling a more conducive listings environment.”
Fourie announced a raft of reforms after the AGM aimed at addressing these issues, from the easing of listing requirements relating to auditors such as the accreditation model, to a separate tech board, cutting red tape, reconsidering the 20% spread requirements in line with global markets, expanding depository receipt offers, and the introduction of new products such as actively managed certificates, and will be introducing actively managed exchange trade funds (ETFs).
David Holland of Fractal Value Advisors reveals that from an analysis of nine of the JSE’s global peers, it has the lowest cash flow return on investment, it is the only exchange to have underperformed relative to its index over the last five years, and it has the lowest price-to-book ratio (the JSE itself is trading at a large discount). The only measure it scored highest on is dividend yield, which is not something to be proud of because it indicates that the exchange is ex-growth, like SA.
Swifter reform
Paging through the JSE’s investor relations material, I see no mention of government policy and ineffectiveness as business activity drivers and key risks. There’s a lot about environment, social and governance, but not the SA governance risks.
When pressed on the issue of lobbying the government for swifter and deeper policy reform, Fourie said much of the work is done behind closed doors. Again, and as I mentioned last week in this column about the government, there is precious little vision from the JSE. Take for example the fact that a 1% reduction in sovereign risk translates to an about 17% improvement in JSE share prices, according to work done by Fractal. A 2% reduction (claw back to investment grade) means at least a 40% increase in share prices.
As the JSE’s total market cap is about R21-trillion, you’re talking about a R9-trillion boost to the local economy. This is the cost of incorrect policy choices and corruption. Surely the JSE should be making this point to the public? The closed-door conversations have clearly not been effective.
The JSE is the lightning rod for key issues affecting the local economy, or the bellwether of its health, as Fourie put it. But it’s hard to ignore that the future of SA’s capital markets as a vibrant wellspring for economic opportunity and increased risk-taking relies increasingly on the JSE spending more energy pushing and educating the government on the need for faster and deeper economic reforms. All other initiatives are small beer, frankly.
• Avery, a financial journalist and broadcaster, produces BDTV’s Business Watch.
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