KEVIN BRADY: Efficient stock exchanges drive inclusive economic growth

Efficient and cost-effective capital markets are key to economic growth and wealth creation. By matching resources with economic opportunities, they support productive enterprises and form the nucleus of free markets.

When compared to its peers in terms of size of economy, SA is in the enviable position of having an advanced capital market. The combined value of our capital market structure is a multiple of our GDP, and this is ranked positively in a global context. We have a sophisticated financial sector, in part as a result of a well-respected and pragmatic regulator. Notwithstanding all the positive accolades, there is one area where we have traditionally struggled: competition within our capital markets.

Capital markets, and in particular a country’s stock exchanges, remain a key aspect to attain sustained levels of economic growth. Capital markets are providers of capital, which is required to fund economic activity. The more efficiently this is done, the lower the cost of raising capital and the broader the range of opportunities available.

Across the globe, secondary stock exchanges have become an established capital markets phenomenon. While we in SA may not have been exposed to the same extent, the reality is that dual or multiple listings of a particular share are common practice internationally.

In SA, we have seen four new stock exchanges being licensed over the past five years or so. A2X was one of these, with a specific focus on facilitating secondary listings for companies that have a primary listing elsewhere, most often on the JSE.

A secondary listing increases the pool of potential investors among whom shares can be traded. This is good for market efficiency. Since secondary listings in SA are a fairly recent development, exchanges are in the fortunate position of being able to deploy the latest available technology to facilitate such trades. In turn, this is driving down costs for participants. So the immediate benefits are real.

Furthermore, the increased liquidity in the share supports price discovery and price formation as bid and offer spreads are narrowed. This also gives the listed entity access to additional capital as it draws more investors.

While the bulk of equity holdings are held by institutional funds and collective investment schemes, there are important mechanisms that link the workings of exchanges to the lives of ordinary citizens.

The first mechanism is the macroeconomic effect of reduced costs of doing business. If the cost of accessing capital is lowered, it is made accessible to more companies, which can use it to grow their businesses and, by extension, the economy.

These amounts are not insignificant: in 2021, in the A2X universe of 56 securities, A2X created available direct savings (in the form of lower exchange fees), and indirect savings (in the form of narrower bid/offer spreads), of a little more than R400m. 

These savings not only enhance the return of the investment but can then be invested in companies with further growth opportunities. This is the “growing the pie” argument: the larger the economy, the more benefit realised among all market participants.

The second mechanism, or link, is collective investor schemes, notably pension funds. The average working South African accumulates wealth through the regular payment of a small portion of their income into a pension fund. These amounts are invested on their behalf, intending to realise enough appreciation on the investment that the contributor can one day comfortably retire.

These pension funds buy and sell a range of equities to create an appropriate risk/return-adjusted portfolio. Narrowing bid/offer spreads leads to better price discovery and efficiency, which translate into savings for clients. 

Throughout a lifetime of contributions, small decreases in costs equate to consequential increases in the amounts accumulated. It is calculated that over a 40-year contribution timeline of an average South African, these savings total a huge R120bn for the industry, with each pensioner retiring at 65 getting a portion of this benefit.

In a nutshell, everyone stands to benefit from the enhanced competition a secondary listing introduces. In SA, a country with many challenges and opportunities, our holy grail remains the achievement of sustainable and inclusive economic growth. By establishing alternative stock exchanges with best-available technology, the capital markets ecosystem will continue to benefit and progress.  

A higher quality market — one that is liquid, transparent, quick, cheap, free of market abuse, secure and with high uptime — reduces the cost of raising capital for issuers, thus fostering economic growth. Most importantly, the end investor, who is often an ordinary person who builds their wealth over a lifetime through monthly incremental savings, can see a substantial portion of that benefit.

The result is a win for ordinary South Africans and businesses alike. Stock exchanges are one instrument to help facilitate such a positive outcome.

• Brady is CEO of stock exchange A2X.