JAMES HAYWARD: Stock markets are not really shrinking, but they are migrating

Some market observers are sounding the alarm that the number of listed equities on some developed market bourses has shrunk in recent years due to delistings and M&A activity.

Among other things, they are concerned that a smaller pool of listed companies means a concentration of power with a few megacaps, and fewer investment opportunities for public investors vis-à-vis private equity investors.

This is also true of the JSE, where the number of listed companies had dwindled to 300 at last count, substantially below its peak of 700.

However, they should not be so quick to sound the alarm.

While the number of listed equities on some developed market bourses has shrunk, the number of listed equities globally has remained stable close to record highs. For every company delisting on one exchange (either due to being taken private, acquired in a M&A deal, or going bust), another one is going the initial public offering (IPO) route somewhere else, even though it may not be on the same exchange or within the same country.

Listing activity, especially in the developing world, has been robust so investors need to cast their nets wider than just developed markets (and certainly wider than just the JSE) if they want to access these exciting new opportunities. This is evident when looking at the increased number of listings on exchanges in the Asia Pacific region, particularly Shanghai and Shenzhen.

Since the IPO of the Dutch East India Company more than four centuries ago, listing minority stakes on global exchanges has been the preferred method to raise capital for growth and for owners to monetise their shares. Listing has unwanted side effects though.

Increased regulatory scrutiny, administrative requirements, underwriting fees and investors’ preference for short-term performance have decreased the attractiveness of offering shares to the public.

This downside paved the way for the rise of private equity firms, and more recently special purpose acquisition companies (Spacs), to provide businesses with another method of raising capital without having to pursue a public listing.

In certain markets, notably the US, this has proven popular, and contributed to the number of listed equities on its bourses falling from nearly 9,000 in 1997 to a mere 5,000 by the start of 2020, a decline of more than 40%.

Reversed course

The popularity of raising capital by other means should not be viewed as a death knell for public markets. Entrepreneurs will raise money where they can source capital at the lowest cost.  During 2021 we saw a record IPO spree as low interest rates resulted in lofty valuations. Even in developed markets we saw an increase in the number of listings, with the Nasdaq surpassing the Shanghai stock exchange.

The number of new listings reversed course in 2022, with the volume coming in 45% below the previous year as investor appetite for risky equities waned. Unicorn IPOs (private companies valued at more than $1bn) fell even more sharply, 81% less than in 2021, after the rich multiples afforded to them resulted in 91% trading below their 2021 IPO prices. However, this still translated into more than 1,300 new investment opportunities.

Due to SA’s economic and political landscape and low growth, many innovative companies in SA are not seeking to IPO because local valuations are too low. SA stocks trade at a sharp discount to emerging market stocks, which in turn trade at a sharp discount to developed market stocks.

In 2021 there were 532 IPOs in the Americas, 1,148 in the Asia Pacific region, and 756 in Europe, the Middle East and Africa. In SA no stocks made IPOs in 2021 (when the rest of the world saw a listing boom), there was only one in 2020 and zero in 2019. It is therefore critical for domestic investors to expand their investment universe beyond the local market if they want to gain exposure to new disrupters and innovators.

While there might be a misconception that investors have fewer stocks to choose from, the numbers indicate that this is not the case when taking a global perspective. More than 40,000 stocks are listed globally, sufficient for fundamentally inclined investors. What matters more is the quality of their research and the ability not to get caught up in the prevailing narrative of the time. 

The year 2021 was a record one for IPOs, but many people who invested in them now wish they hadn’t. Just because a unicorn is set to IPO doesn’t mean it will deliver the goods.

• Hayward is global equity analyst at Flagship Asset Management.