The problem for the JSE, it turns out, isn’t so much delistings — it’s the lack of new listings.
Delistings, as it happens, are a feature of stock exchanges everywhere. Currently the US markets have roughly half as many listed companies as in the late 1990s — down from just over 8,000 to about 4,000. Over at London’s main market, the number of listings has shrunk to 1,100 from 2,700 in the mid-1990s — a drop of almost 60%.
True, the JSE shrinkage rate is worse — but not by that much: its 263 listed companies are down 69% on the 850 of the late 1990s.
For those who believe size is everything, the good news is that the JSE’s overall market capitalisation has increased significantly over the same period. The not-so-good news is that five companies make up roughly half of that market cap.
The larger market cap is, of course, because of the inclusion of massive dual-listed entities such as BHP, Anglo American, Glencore, AB InBev, British American Tobacco, Naspers, Investec and, most recently, Canal+.
On the face of it, the JSE’s delistings pattern is more or less in line with the proper functioning of an equity market.
About half of the delistings resulted from corporate consolidations with some going private or being taken over at a premium.
Compliance costs discouraged some small and mid-sized companies from remaining listed; a particular concern given the chronic tendency for shares to be underrated due to lack of investor interest.
Then there were the offshore relistings and dual listings as major South African companies opted to list on larger international exchanges in a bid to access deeper capital resources. This tendency also impacted London’s numbers.
Whatever about the pace of delistings, there’s little doubt that for the very large local and global companies, the JSE is providing an attractive setting.
However, if you consider the functions of a stock exchange to be the raising of capital, provision of liquidity and exit, price discovery as well as transparency and accountability, then the JSE isn’t doing a great job.
Where things go badly askew is the not-so-large local companies, the ones referred to as the small- and mid-cap stocks. For a whole host of reasons, the JSE has become a rather hostile environment for them — the sort of environment that discourages other listings.
Make things more attractive for small- and mid-cap stocks, and new listings will flow.
As it happens, only two of that host of reasons can be blamed on the JSE itself — the associated regulations and the costs. But peel back the regulations too much and you risk losing one of the enticements for investors. As for the costs? There are ways of paring some, though it’s worth pointing out that they’re in line with international bourses.
Problematic price discovery
No doubt price discovery is top notch when it comes to the large companies. But it often goes haywire with the small- to mid-cap counters. Consider the case of Omnia, the latest company to entice international attention because of its bargain-basement price.
For years, Smalltalkdaily’s Anthony Clark has been telling the world how underrated the Omnia share is. To little avail. Then, along comes a much larger global player and confirms Clark’s view by making a premium-rich offer to shareholders. So much for efficient price discovery.
Without that, other stock exchange functions fail. A company is unlikely to want to use its listing to raise capital if it believes its share is substantially underrated. This is partly why the JSE is rarely used for capital-raising. Today companies on the JSE are much more likely to be the source of capital for shareholders as they spew out cash for dividend payments and buybacks.
In addition, if a share is not properly priced, liquidity is likely to be patchy, making an exit difficult unless it’s via a well-resourced global player with an eye for a bargain.
Clark tells the FM there’s currently a complete lack of interest in small- and mid-cap stocks. “Valuations have tumbled to about six to seven times; in the late 1990s the average p:e of a small cap was around 18 to 19 times,” says Clark.
There’s a cyclical element. Three years ago, when the economy and politics looked more upbeat, small caps enjoyed a surge of about 60% says Clark. But soon investors lost interest. “When things get dirt cheap, investors will start to look again as they’ll be fearful of losing out on a star performer, but now there’s no compunction to invest in small stocks,” Clark tells the FM.
That’s partly because in South Africa right now there’s not much compunction to do anything. There’s barely discernible economic growth, diesel costs keep rising, interest rates are on the up and there’s political uncertainty wherever you look.
It hardly matters that raising capital on the JSE is challenging when there’s little or no demand for capital.
Removing the hurdles
There’s not much the JSE can do to counter these cyclical forces, but longer term, with the assistance of other regulators, it could tackle the impact of structural issues.
One key area to address is the dominance of the 10 large institutional investors that manage about 90% of the country’s savings — estimated at about R9-trillion. For a variety of reasons they tend to ignore the small- and mid-cap stocks and focus on the largest 80–120 listed companies.
One commentator has suggested regulators mandate that a fraction of that savings pool be dedicated to the smaller, overlooked shares, which would include exploration companies.
Efforts should also be made to bring retail investors back into the market. They tend to favour smaller equities and should be enticed back by the sort of tax advantages offered to the collective investment schemes.
Of course, one quick, easy fix to the moribund pace of listings would be a complete overhaul of mining legislation, which is currently throttling the industry.
In the absence of a US-style tech boom, South Africa’s market could be bolstered by the same mining industry that gave birth to the JSE. Instead, as Peter Major, director of mining at Modern Corporate solutions, recently noted: “We’ve been in the greatest commodity boom the world has ever seen. A 22-year super-cycle, and our industry is dying.”
Meanwhile mining in Australia, Canada, America and the rest of Africa is booming — just ask Omnia.
Perhaps the biggest problem behind the lack of new listings is the plethora of own goals.