Can the JSE survive?

MONEYWEB, Shirley Kemp, 29 January 2004

The JSE’s closure of the VCM and DCM boards has raised the issue of the long-term survival of the JSE itself.

The controversy over the JSE’s decision to close its two flagging VCM and DCM boards has raised another far more serious issue: The long-term survival of the JSE itself. By the time the Venture Capital and Development Capital boards shut their doors later this year, 37 listed companies will have had to decide whether to move to the main board of the JSE, transfer to the new alternative exchange, AltX, or remove themselves from the public eye altogether.

It is hoped that this will see an end to the flood of delistings experienced by the JSE over the last few years. Since the end of 1998, 359 companies have delisted compared to 116 new listings. Although the number of delistings has fallen each year since 2001, so too has the number of new listings – with only 8 new companies coming to market in 2003.

This worrying trend has caused some concern about what will happen to our market if it continues. Since the end of 1998, the total number of companies listed on the JSE has dwindled from 668 to 426 – an average decline of 48 companies per year. If that rate continues, the JSE would be left with no companies inside of ten years. Already among the list of companies set to disappear this year are Pepkor, Avis, Afrox Health, McCarthy and Nail.

CEO of the JSE Securities Exchange, Russell Loubser, is not too worried. He says the trend in South Africa of more company delistings than listings is not unique – it has been a worldwide phenomenon in recent years as a result of the general global economic downturn. He adds that “the world must regain confidence in equities before taking companies public again.”

There have also been two SA-specific factors that have fuelled the number of delistings here he admits – but says that both are now issues of the past. First is that “in the old days” merely by virtue of being a member of the JSE, companies were automatically entitled to be a sponsoring broker and bring new listings to the exchange. This, says Loubser, resulted in a number of companies coming to market “that I believe should never have been listed”.

The second factor was a set of JSE Listings Regulations that were nowhere near tight enough, also allowing for companies of less than the highest ilk being awarded listings. Many of the companies that arguably should never have been listed in the first place are now out of the system, says Loubser. And with (also arguably) better quality companies making their debut on the JSE, the tide of farewells should be stemmed. Loubser admits that it doesn’t help the JSE to have companies such as Pepkor “that delist for completely different reasons” – but he still holds out hope that these companies could return to the market in a few years time.

Loubser also argues that while the number of listings has fallen sharply, the total market value of the JSE has not done the same. In fact, it is currently nearing its all time high of around R1,9 trillion. This is because of the heavy weighting the 100 biggest companies carry on the JSE (making up 99% of the market value), which means that the loss of a few smaller companies has relatively little impact.

For local investors, the delistings trend may not have had a substantial effect on the total value of the JSE, but it has certainly limited the choice offered to investors. It also presents retirement funds, unit trusts and other collective investment schemes with a smaller universe from which to choose.

At the same time, the cost of being listed remains an issue and for some the low interest rate environment, which makes borrowing cheaper, is providing a more attractive alterative to raising capital than a JSE listing.

Another concern that has been raised is the dominant position that the biggest shares on the JSE have, their influence on the market and what will happen to them if exchange controls are lifted. It is possible that without exchange controls a slew of our top quality companies would be fighting to move to offshore exchanges where liquidity is higher and international investors interest is likely to be more keen.

In South Africa, the Top 40 JSE-listed companies make up approximately 90% of value traded on the JSE and more than 80% of the market capital. Of these, the top 20 make up almost three quarters of the market trade, and the top three (Anglo American, Billiton and Richemont) constitute about a quarter. In addition, the top 40 companies are almost 60%-held by foreign shareholders.

Add to this the fact that the prices of many of the top40 shares are already made by trade in offshore markets and it is clear why some are concerned that, as a growing number of local shares migrate offshore, less and less trade will be executed on the JSE.

Again, Loubser is not concerned. “I believe the JSE is actually at a disadvantage due to the remaining exchange controls,” he says. “People have had the opportunity to invest offshore for a long time now – if controls were lifted, I could offer investors those companies on the JSE.” With the same systems and a good regulatory environment, Loubser says there is a huge opportunity for the JSE to attract foreign companies and provide investors with greater investment choice on their doorsteps.

Derivatives trader at Nedcor Securities, Arthur Buchner, agrees that without exchange controls, South Africa offers an attractive alternative listing desination for international companies: “It is much cheaper to list on the JSE than London’s FTSE,” he says. In addition, he sees opportunities for companies to list in South Africa, rather than London or the US, as emerging market shares. Some resources companies, too, may prefer to list here, “knowing that they could get people to trade in their share regardless of where they are listed,” he says.

He adds, however, that without exchange controls, local traders would also have the opportunity to trade in bigger volumes overseas and this would likely encourage greater portfolio diversification. According to Loubser, trade in the JSE-listed companies which have transferred their listings offshore, has increased after each move. “That’s normally the experience when a good company lists on a foreign exchange,” he says.

But BJM’s David Shapiro says that although he remains supportive of the JSE, “there are issues here that concern me – and I don’t know whether the JSE has either got the knowledge or the expertise to address them.” One of his concerns is the migration of local companies offshore. “Your centre of gravity and your market of choice moves across the water and that means services like corporate finance and research follow.”

In Shapiro’s view, an American investor would choose to buy Anglo American shares in London rather than in South Africa, “because that’s where the market is made,” liquidity is higher and there are no exchange controls. “Until the 1960’s we were the gold market,” says Shapiro, “now that’s gone, we don’t have anything to offer (international investors)”. In Shapiro’s view, the danger is that once exchange controls are lifted, there will be little need for the JSE: “any institution can build up an international portfolio through the internet.”

He believes that the JSE needs to try to re-establish South Africa as an investment destination. “We have to find an area that makes us appealing to the rest of the world,” he says.

Over the last few years, however, the JSE has done very little in terms of its marketing and efforts to keep people listed. “It has given up its franchise to unit trust companies, so private individual feel they are not wanted on the JSE,” says Shapiro. He reminds investors that the motto of JSE used to be ‘own a share of South Africa’. “When you get individual shareholders back, it will encourage companies come back on the market.”

Buchner has a different outlook for the future of global investing. “My view is that within three to four years there won’t be any market,” he says. Buchner believes that at some point in the future all of the stock exchanges around the world will amalgamate under one bourse to offer price-making capabilities. This way anyone, anywhere will be able to invest in any market, he says.

Although this is not a widely acknowledged theory, Buchner says those who have worked in an environment such as Europe’s Internaxx system, will understand it. Internaxx offers investors real-time online access to all major stock exchanges in North America, the United Kingdom and Continental Europe. It may, however, be many years before this kind of system is available across the world, says Buchner. Buchner’s theory stems from Irish trader and author, Patrick Young. In his book Capital Market Revolution he described the concept of the disintermediation of markets and the development of business to business exchanges, and predicted a broad range of financial changes.

For now, however, the JSE must deal with the challenges of a shrinking local market, increasing interest from South Africans in foreign investments and continued migration of local shares to offshore exchanges.

Posted in Market commentary

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