After the Bell: Will the JSE’s decision to split the exchange work?

It’s very obvious to market watchers that the JSE is at once a grand success and a fading rose. It is, by huge margins, the largest stock exchange in Africa and the total value of the stocks on the bourse is massively larger than the GDP of the country – a rare phenomenon around the world.

On the negative side, delistings have become a depressingly common occurrence. When I started working as a financial journalist way back when, there were more than 600 company stocks on the exchange, as opposed to listed funds and so on. For a time, the number was held by large numbers of real estate investment trusts, basically property funds.

But about 15 years ago, the number of listed stocks started dropping, and now the situation is chronic. Twenty years ago there were 470 or so stocks, with a market cap of $182-billion, Wikipedia tells us. Today there are around 270 stocks, but the market cap is $1.3-trillion. 

How can that be, you ask? Smoke and mirrors, I say. The total market cap of the exchange is fabulously boosted by dual listings and cross-holdings with companies essentially based outside the country. In fact, the eight largest companies on the exchange measured by market cap are essentially foreign companies. By a rough estimate, about 65% of the total value of the exchange is vested in business outside South Africa. This has huge implications for the echo system; lawyers, advisers, bankers, and stock brokers. Much of the work that surrounds companies is now done overseas.

The other problem is that trading is concentrated at the high end of the exchange. By some measures, 97% of the value of trading on the exchange takes place in the top 100 stocks. A large chunk of the logic of a stock exchange is to allow innovative small companies room – and money – to develop. Yet, the middle of the JSE is kinda moribund.

Raising cash

So what the JSE has done, very sensibly IMHO, is essentially split the exchange into two and reduce the restrictions and red tape for smaller companies. So there will now be a “prime segment” and a “general segment”. Changes to ease the rules of the exchange for the general segment are many and varied. The most important one will be to make it easier to raise cash – and few of the companies in this segment are going to argue with that. 

There is a question mark hovering over whether or not these simplified rules increase investor risks, but to me, they are incremental changes and nothing stands out as egregiously dangerous. But we won’t know until something goes wrong, and as we know, if it can go wrong, it will. To be part of the general segment, a company cannot be part of the FTSE/JSE All Share Index, which has specific free-float and liquidity requirements. That in itself is a fairly onerous barrier and it means that just over 100 companies will be eligible.

The larger question is why the number of listings is declining and prompting all these changes. The most obvious answer is that the SA economy is to blame. Companies tend to list on the exchange if they intend and hope to grow. But with so little growth in the economy as a whole, company execs are just not seeing growth at a pace that would require access to large dollops of capital. Instead, we have a situation where companies that have already listed are resting on their laurels, essentially waiting for growth to happen. This is not ideal. 

However, the explanation around economic growth is only part of the whole story; there is also a structural problem because the decline has been taking place in periods of both high and low economic growth. I suspect part of the problem is that SA’s junior mining sector has been decimated by the ANC’s defunct and hostile mining administration. SA’s stock market grew up essentially because mining is a very capital-intensive business and the JSE provided the avenue to raise it. But it’s just amazing how a country as blessed as SA is in mineral wealth has seen so few new mining companies listing. The same applies to other sectors, though mining is what stands out.

But honestly, I don’t want to sound overly negative here. One measure of the exchange is the market capitalisation of the listed companies as a proportion of their revenue. And by this measure, the exchange is trading around 117% of revenue. That’s pretty much in line with exchanges around the world, outside the US.

But could that be better? Obvs. DM