Is the “shrinking” JSE a sign of a sinking ship?
The number of companies listed on the JSE has decreased from 776 to 331 over the past 30 years, with over 14 companies delisting every year on a net average basis. This has spurred market commentators to discuss the JSE’s “slow death” in the context of a struggling local economy, with many arguing that investors should take their money and run. Is it this simple and should investors be worried? “There is cause for concern when a net delistings trend emerges over time. This could be symptomatic of a faltering economy and persistent negative business sentiment, but there are a number of other factors at play,” says Nadia Van der Merwe, senior manager at Allan Gray. Looking at history to understand trends
Considering the total number of listings on the JSE, much of the decline over the last 20 years occurred during the early 2000s, driven by a high number of delistings combined with few new companies coming to market. Following the tech crash, sentiment was severely depressed, and many companies struggled. Some of them failed, several were taken over. The number of listings subsequently stabilised and remained broadly constant from 2004 to 2016. Since then, fewer new companies have come to market, while delistings remain at broadly similar levels.
“Over the past 30 years, we have experienced three major cycles of new listings, each driven by a specific sector. While elevated markets should generally boost listings across sectors, there are often specific sectors characterised by conspicuous optimism. It is unsurprising that in the late 1990s, at the height of the tech boom, technology companies comprised a significant portion of new listings. During 2006 and 2007, in the build-up to South Africa hosting the 2010 FIFA World Cup, it was the construction sector. For most of the 2010s – the glory days of listed property – real estate listings were plentiful,” says Stephan Bernard, manager at Allan Gray.
Consolidation of companies into larger listed corporations
A huge global trend, in line with what Bernard is seeing happening with the JSE, is the consolidation of companies into larger listed corporations.
“The number of listings may have declined, but the average listed company is significantly larger today than it was 10, 20 or 30 years ago, even after adjusting for inflation. The total market capitalisation has increased significantly over time, and it is fair to say that the decreasing number of listings does not necessarily signify a weaker market,” says Bernard.
Van der Merwe illustrates this by explaining that in 1982, there were 93 companies listed in the mining sector, 45 of which were individually listed gold mines. “Today, only seven locally listed gold miners exist – all owners of a portfolio of mines.”
Smaller companies delisting
Bernard says that the downward trend in the number of company listings over the past decade is mostly a result of delistings among small businesses that fall outside the acceptable size and liquidity range of the average asset manager: During 2020, there were 19 company delistings, 16 of which were smaller than mid-cap. In 2021 to date, there have been 11 company delistings, with 10 smaller than mid-cap.
“The market capitalisation of new listings has exceeded that of delistings every year since as far back as 2008,” says Bernard, adding that the number of companies with market capitalisations above R5bn (in 2021 rand value) has increased over time – from 83 in 2000 to 113 in 2010, and 121 in 2021.
“This suggests that the investment universe for larger investors has actually expanded over time. Drilling down one further layer, many of the more prominent delistings of recent years have been for reasons that suggest value and confidence in future returns, rather than because of businesses failing.”
Major delistings include Clover, Pioneer Foods, Assore and Comair.
“All but Comair were takeovers or management buyouts, indicative of the attractive levels at which many of the shares on our market trade. News that Heineken is considering the acquisition of Distell and Standard Bank's intent to buy out Liberty are further supporting examples,” says Van der Merwe.
Companies staying private for longer
Globally it appears that companies are staying private for longer, partly driven by the growing availability of private equity, which offers an alternative source of funding. For example, Airbnb raised US$5.4bn in private funding to grow the business ahead of its US$3.5bn IPO in 2020. It was valued at over US$86bn after its first day of trade – a sizeable business for a new listing.
“The greater availability of private capital could mean that companies that would otherwise have listed for funding fail before they reach that point. The other observation is the tendency of some large growth companies, such as Naspers and Amazon, to have a portfolio of ‘start-up’ ventures. In this manner, these companies are providers of early-stage funding, with the potential of spinning off successful businesses as they reach scale,” says Van der Merwe. However, she adds that a heavy regulatory burden remains a listings deterrent – and a driver of delistings – in a post-global financial crisis world.
“We cannot ignore the impact of South Africa’s macroeconomic challenges on the listed equity market. Without efforts to address these, it will be difficult to significantly grow the breadth and depth of the market. However, notwithstanding the challenges, the JSE remains one of the world’s 20 largest exchanges by market capitalisation. Many of our market’s challenges are not new, yet South Africa has been a great place to invest over the very long term,” says Van der Merwe.
Bernard, too is optimistic.
“Prominent recent delistings support the view that local shares are trading on attractive valuations. We think there is upside from here. And should sentiment turn, we may well see a reversal in the delistings trend too.”