South African retirements under threat from shrinking JSE

The spate of delistings seen on the JSE over the past few years could pose a significant threat to South Africans’ retirement funds.

This is feedback from Sasfin Asset Consulting’s head of advice, Johan Gouws, who told Kaya Biz that the number of companies listed on the JSE has nearly halved over the past two decades.

Twenty years ago, there were just over 470 listed companies on the JSE. Today, this number is around 287.

Particularly in the past few years, the JSE has seen a spate of delistings – a trend projected to get worse.

Over 20 companies were delisted from the exchange in 2022 alone. The number of companies listed on the bourse has dropped by more than half over the past 30 years. 

In 2022, AmaranthCX rang the warning bells for a string of delistings from the JSE.

The company said South Africa had 332 listed companies across the JSE and the three challenger stock exchanges at the beginning of 2022.

AmaranthCX director Paul Miller said that during the first half of 2022, 18 companies were delisted from the JSE and other exchanges.

Fourteen more companies are in the formal process of delisting or are subject to corporate action likely to result in their delisting.

There are also 16 companies suspended from trading or which have not been able to publish their financial results.

AmaranthCX’s research suggested that at least 32 companies, potentially far more, will delist from South African stock exchanges this year. 

This means there are fewer companies for asset managers to invest in on behalf of retirement funds and the members of those retirement funds, Gouws said.

“If you just look at the structure of a retirement fund, regulations require them to have a default ‘life-stage strategy’,” he said.

“Any member that is part of a fund that doesn’t make a specific choice will invest it according to the strategy.”

This strategy, he explained, states that the further you are away from retirement, the more risk you can take in your portfolio to get the best growth. 

“This means that Regulation 28 of the Pension Fund Act allows a retirement fund to invest up to 75% of the fund in growth assets like listed stocks locally or offshore.

Therefore, most retirement money in retirement funds is held as high equity multi-asset class funds. 

“We constantly monitor the kind of exposure that the different asset managers have to these asset classes,” he said. 

“And we can see that for these high growth portfolios where most of the investments of members are invested, around 40% to 45% of the whole is in South African listed shares.” 

“So that is why whatever happens to the JSE and the shrinking JSE at this point in time, it really has got quite a few implications potentially for retirement funds and specifically the asset managers that are supposed to manage that.”

He said the shrinking JSE has led to concerns around bigger concentration risk because there are now fewer stocks available to invest in. 

Fewer stocks mean asset managers, specifically larger asset managers, have to take larger positions in certain stocks.

This also exposes retirement fund members and asset managers to liquidity risk.

For example, when an asset manager wants to sell out of a fund within a specific time, they may not be able to do so because there is not sufficient liquidity in the fund, and they will, therefore, have to sell at much lower prices than they would have. 

Gouws specified that these risks are not reasons for panic at this point in time.

“But I do think we need to look at this and think about how we can manage the increasing potential risk of what I’ve just explained in terms of concentration risk and liquidity risk,” he said.

In addition, he said there are measures to counter the shrinking JSE at this point.

For example, Regulation 28 now allows retirement funds to invest up to 45% offshore.

“I’m not saying they must go to 45% because it brings with it also its own currency risk, but we’re saying that about 30% to 35% is what a lot of the studies are showing is where the optimal point is.”