JONATHAN BOTHA: JSE delistings raise concentration risks

The number of listings on the JSE, Africa’s largest stock market,  halved over the past 20 years, leading to reduced trading volumes and limited investment options for savers.

This steady decline in listings shows the number dropping from more than 600 in 2001 to fewer than 300 now. The exchange experienced an average of 25 companies delisting yearly for the past seven years. High-profile delistings include Pioneer Foods, Mediclinic, Distell, Massmart, PSG Group, Clover, Royal Bafokeng Platinum and Liberty. 

This decline is due largely to substantial costs associated with compliance, reporting and other legal and administrative requirements. Being publicly listed imposes obligations on companies, pressuring board members to deliver consistent short-term performance, which can deter businesses from maintaining listings. 

Though the JSE’s robust regulatory environment is designed to protect investors, overregulation can make the market less attractive due to the extensive, rigid reporting requirements. This environment has led to some well-known SA companies being acquired by foreign investors and then delisted. Notable examples include Heineken’s acquisition of Distell and Pepsi’s acquisition of Pioneer, driven by the value seen by these foreign entities in the SA market. 

Red tape and high costs associated with JSE listings have impaired small companies’ ability to list on the bourse. In the 1990s there were 800 listed companies, compared with about 285 now. It would seem that the cost of compliance and regulation drove many companies to delist, seek alternative listings on other exchanges or avoid listing altogether. 

However, the JSE is implementing a “simplification project” to revise its listing requirements using more understandable language, aiming to attract more companies. This initiative is part of a broader strategy to enhance the exchange’s attractiveness by reducing regulatory burdens and cutting red tape. 

Compliance burdens

The belief is that this undertaking will cause a big reduction in the volume of requirements to list on the bourse. The exchange will also assess the regulatory relevance of each provision and ensure that the requirements are fit for purpose and aimed at an effective, appropriate level of regulation.

The trend of delistings is not unique to SA; stock exchanges globally, including those in Frankfurt and New York, have also experienced delistings due to the heavy compliance burdens that make them less attractive for raising capital. The London Stock Exchange has had many delistings and also experienced a decline in aggregate market capitalisation. Similarly, the number of listed companies in the US fell from more than 8,000 in 1996 to about 4,000 now, with valuations increasingly concentrated in mega-cap stocks.

Though the number of JSE delistings stabilised over the past decade, the lack of new listings remains a concern. The JSE is aware of these challenges and working to attract investors and simplify the listing process for businesses. Initiatives such as plain-language documentation and compliance support are part of this effort. The goal is to ease regulatory demands without compromising investor safety. While this initiative is a positive step, it remains to be seen whether it will be sufficient to reverse the declining trend. 

The net result is that the JSE has ended up with a concentrated market; a handful of large stocks dominate the overall market cap of the JSE. Companies such as Naspers, FirstRand, Standard Bank, Gold Fields and Anglo American account for about 35% of the overall market.

Diversification is crucial in an investment portfolio as it mitigates risk by spreading investments across various geographical regions as well as different asset classes and sectors. This strategy reduces the effect of poor performance from any single investment, as losses in one area can be offset by gains in another. By diversifying, investors can achieve more stable returns over time, as the portfolio is less vulnerable to market volatility and economic downturns.

Staying on track for the long haul is easier with accountability and an objective sounding board. Working with a certified financial planner (CFP) to co-create your own sound financial plan gives you the greatest likelihood of staying the course successfully to manage what is likely the most significant long-term project you’ll ever take on: steering yourself to financial independence on your own terms.

• Botha is wealth manager at Netto Invest.