Marius Strydom outlines the two driving factors behind the mass exodus of businesses from the local bourse. Although the delisting trend is not unique to South Africa, the pace of them is. Marius puts this down to a decreasing number of foreign shareholders in local businesses, indicative of the negative sentiment towards JSE-listed businesses. The second is a slide in analyst coverage, which has decreased significantly, especially in the small to mid-cap space. Lack of coverage leads to thin volumes and an absence of interest, which takes away many of the primary benefits of being listed. Lastly, Marius focused on solutions to change the direction of the trend. – Justin Rowe-Roberts
Marius Strydom on the headwinds facing the JSE:
The coverage is certainly an issue, especially for the small and mid-cap stocks. They are not seeing the benefits of being listed if they are not being talked about. They don’t have sufficient consensus numbers and don’t appear on the radar screens of investors out there. I guess another trend is the increase in passive funds. If you are not in the index, you’re not held. Therefore, again, the smaller companies are dependent on active investing. If there isn’t proper research on them, the investor has to do a great deal of work themselves to better understand these small companies. It’s not clear that the benefit is there to do all of this work, to hold such small companies.
On the importance of foreign shareholding on the JSE:
The most important reason is we have a natural floor to investing in the JSE from South African investors. We have got foreign exchange regulations. You can only take so much out, so the race must be invested here. We’ve got big investment by black economic empowerment, which provides support for the market. And then we have got the PC that invests in a great number of South African companies. There’s a floor and the shareholding can’t really fall below it. But this makes offshore investment so much more important. They are, most of the time, the marginal buyers who push demand for South African companies up or down. So, if they have more demand for our companies, the JSE’s rating increases. But if they are selling out of the JSE, then the rating decreases. You know, this supply and demand dynamic is sometimes as important as the underlying results of these companies. If you look at the price-to-earnings ratio of the JSE All Share Index at the moment, it is $40 below the FTSE 100, which in its own right is depressed and well below half of what the S&P 500 is. That’s not all owing to high growth expectations. A lot of that is simply because of the demand dynamic not being conducive for the JSE.
On solutions to the problem:
You find different ways of promoting research in your stocks. Many international bourses – the Deutsche bourse is a good example – partner with research providers to provide coverage on undiscovered segments of the market. That certainly is one way of doing it. The JSE will look at options like that. In my opinion, you also need to find a way of getting the more interesting, exciting companies on your platform. But you have to offer them more than simply a place to trade the shares. These companies must find improved access to capital and improved visibility through the listing. We have got many alternative bourses now as well in South Africa, and I think there is going to be a push for these alternative bourses.
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Cyril Ramaphosa: The Audio Biography
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Narration by Alec Hogg