The answer to South Africa's bankrupt and broken state-owned enterprises is to list them on the JSE, says Sam Mokorosi, the head of origination & deals at the bourse.
This would help to recapitalise them and boost the economy as well as the fortunes of the JSE which is grappling with a listings crisis.
Australia did it, he points out, which is a big reason its stock exchange has been flourishing while the JSE has been in decline.
“One of the things Australia did well is a whole lot of listings of government entities such as Qantas and Bank of Australia. All of these companies that were listed 30 years ago reignited the imagination of the man on the street to invest in these national assets.
“That's a model we are highlighting to government.”
It's not as unrealistic as the woeful state of SOEs or the government's ideological opposition to the concept may suggest, he says.
“There were times when many of our SOEs were world class. But at that stage government, from a philosophy perspective, would never want to list. Now that these SOEs need so much capital we're starting to see a shift in the government's philosophy to say: 'Well, maybe we could list some of them, even if it's not a full listing.'”
It's not as unrealistic as the woeful state of SOEs or the government's ideological opposition to the concept may suggest
The JSE has heard from the investor community that there's a willingness to invest in strong SOEs with good governance, good management and good growth prospects.
In its exchanges with the government, the JSE's message is that “the work to fix the SOEs is absolutely crucial. Once you fix them and list them the capital is available to recapitalise these entities.”
Has the JSE told the government forcefully enough that it doesn't have many options?
“National Treasury has been ringing the alarm in government circles, to say that the fiscal situation is tough and there needs to be fiscal consolidation across government.”
Mokorosi says from a regulatory perspective the JSE is trying to address the listings crisis by making it easier for companies to list and stay listed without damaging investor protections.
“The global economy is so competitive that investors always have choices and so we want to make it as attractive as possible to list on the JSE.”
They won't be asking government to follow the example of UK prime minister and former chancellor of the exchequer Rishi Sunak, who is lobbying foreign-listed companies operating in the UK to list on the London Stock Exchange rather than on the New York Stock Exchange.
What they are doing, he says, is accompanying senior ministers to New York to sell South Africa as an investment destination.
They can't be having much success?
“I think there are a lot of examples where we are,” he says, citing bond inflows despite the fact that foreign investors have been dumping South African bonds since 2019.
“That is a trend we're worried about, but it shifts from quarter to quarter. Obviously, our credit rating is a challenge. We're no longer investment grade and so we've been falling out of a lot of the bond indices and our market is undervalued.”
Meanwhile, delistings from the JSE are happening at an average rate of 25 a year, with African Rainbow Capital Investments signalling last week that it is likely to be the next big one to go. They're trading at such a huge discount to their net asset value (NAV) that they're questioning the value of being listed.
This is less about the JSE than investors wanting to be closer to the operating assets to get full value from those assets, says Mokorosi.
“It's a matter of investor preference. Investors are saying they don't highly rate, from a share price perspective, investment holding companies. That's why they're trading below NAV.”
The fact is that private equity companies give them and other companies far higher values than the JSE?
“Than the investors on the JSE,” he says. “We can just create an enabling environment for capital flows; we don't dictate where investors see value or where they don't see value. It is up to companies to demonstrate their value to investors to get the full exposure of their listing. Delisting is a global phenomenon primarily because we've seen private equity and venture capital increase globally and in South Africa.”
The majority of delistings are of small cap companies that struggle to attract capital because the asset managers are so large, he says.
“As much as they may like a small stock because they think it has upside potential, the size relative to their portfolio makes it very difficult for them to invest in small caps.”
The JSE is having policy conversations with the Treasury and the Financial Sector Conduct Authority “about the fact that there is an unlevel playing field between retail investors and institutional investors” and what can be done about it.
They want changes to the capital gains tax rules that favour institutional investors, and to the liquidity rule for unit trusts, which makes it hard for unit trust managers to invest in small caps.
Other suggestions to bolster investment in small caps include tax deductions if investors hold a small cap for between three and five years.
Mokorosi, who headed corporate finance at Vunani Capital before joining the JSE three years ago, says stockbrokers have lost their appetite to promote smaller caps because efforts to protect retail investors have made that process so burdensome.
“It's something we're talking to the FSCA about. To say, how do we right-size some of these regulations, to bring back that vitality in the small cap space.”
But overall, he says, the delistings and paucity of new listings is the result of market forces.
Why then is Australia, which is subject to the same market forces, getting so many new listings?
One of the things making their retail participation so strong is that people are allowed to put some of their pension into whatever stocks they like, he says.
“We don't have that in South Africa, where retail investors can stock pick inside their pension funds.”
This is something else the JSE has been having “long and complicated conversations” with the government about.
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