The Johannesburg Stock Exchange continues to face questions over its declining size, with two more write-offs – CSG Holdings and Alaris – announced on Monday, October 11.
The number of companies listed on the JSE has grown from 776 to just over 330 over the past 30 years, with more than 14 companies delisted each year on a net average. Data published by Bloomberg shows that 21 companies had already delisted in 2021 until September.
This prompted market commentators to discuss the JSE’s “slow death” against the backdrop of a struggling local economy, with many saying investors should take their money and flee.
“There is cause for concern when a pattern of net radiation emerges over time. This could be symptomatic of a faltering economy and lingering negative corporate sentiment. Yet there are several other factors at play, ”said Nadia Van der Merwe, senior manager at Allan Gray.
Considering the total number of JSE registrations, much of the decline over the past 20 years occurred in the early 2000s, due to a high number of write-offs combined with few new businesses arriving. on the market.
The number of listings subsequently stabilized and remained broadly constant from 2004 to 2016. Since then, fewer new companies have entered the market, while write-offs remain at broadly similar levels, said Stephan Bernard, director of Allan Gray.
“Over the past 30 years, we’ve seen three major cycles of new listings, each driven by a specific industry. While high markets should generally drive listings across industries, there are often specific industries characterized by clear optimism, ”said Bernard.
“It’s no surprise that in the late 1990s, at the height of the tech boom, tech companies accounted for a significant portion of new registrations. In 2006 and 2007, during the preparation of South Africa, host of the 2010 FIFA World Cup, it was the construction sector. Throughout most of the 2010s – the heyday of listed property – real estate listings were plentiful. “
Business combination into larger listed companies
In line with what is happening with the JSE, a global trend is the consolidation of companies into larger listed companies.
“The number of listings may have gone down, 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 cap has grown dramatically over time, and it’s fair to say that the decreasing number of listings doesn’t necessarily mean a weaker market,” said Bernard.
Van der Merwe illustrates this by explaining that in 1982 there were 93 listed companies in the mining sector, 45 of which were individually listed gold mines. “Today there are only seven locally listed gold miners – all of them owning a portfolio of mines.”
De-rating of small businesses
Bernard said the downward trend in company listings over the past decade is primarily the result of write-offs among small businesses that fall outside the manager’s acceptable size and liquidity range. ‘average assets.
“The market capitalization of new listings has exceeded that of write-offs every year since as far back as 2008,” says Bernard, adding that the number of companies with a market capitalization above 5 billion rand (in value in 2021 rand) has increased. over time – from 83 in 2000 to 113 in 2010 and 121 in 2021.
“This suggests that the investment universe for large investors has actually widened over time. Exploring another layer, many of the most significant write-offs in recent years have been driven by reasons that suggest value and confidence in future returns, rather than because of corporate bankruptcy. “
Major write-offs include Clover, Pioneer Foods, Assore and Comair.
“All except Comair were takeovers or management buybacks, indicating attractive levels at which many stocks in our market are trading. The news that Heineken is considering acquiring Distell and Standard Bank’s intention to buy Liberty are further supporting examples, ”said Van der Merwe.
JSE Managing Director Leila Fourie acknowledged some of the criticism of the radiation, but also noted that South Africans are “”congenitally negative ‘.
In an interview with the Courier and tutor in June, Fourie said the radiation wave is also a global phenomenon and not just local.
The economic slowdown triggered by Covid-19 has caused several companies to lose investor support, especially those with smaller market caps, and ultimately to go off the listing, she said.
“You will always have smaller businesses that want to cash out on an exchange. And you will always have large entities that want to raise capital for large investments. “
However, Fourie raised concerns on capital outflows from South Africa, which have increased steadily in recent years.
In a written submission to parliament on the new Treasury tax bills in August, the JSE said South Africa’s macroeconomic environment had deteriorated over the past five years. All three global rating agencies downgraded their South Africa sovereign credit ratings in 2020.
Fourie said Business day that South Africa needs to do more to advocate for investment in the country. “I normally sleep very well, but if anything stole my sleep, it would be foreign flows,” she said.
“I am concerned about South Africa’s divestment, and I believe that as a country we need to do more to spread a positive narrative and start building a coalition of will between the public and private sectors to try to attract more financial support and more inbound investment.
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