JSE feels the pain – but a recovery is coming

The JSE Ltd., operator of Africa’s largest stock exchange, had a slow start to the year due to increased uncertainty in South Africa in the build-up to the country’s election at the end of May. 

This increased uncertainty resulted in many investors adopting a ‘wait-and-see’ approach to investing in South African assets, putting the company’s revenue under pressure. 

As a result of this, the company’s revenue from equity trading plunged by 12% to R212 million, while cash generated from post-trade services fell 1.6%. 

Revenue for the six months to the end of June grew a paltry 4.3%, with net profit remaining flat at R493 million. 

Worryingly, the pace of growth in expenses outstripped its revenue growth as operating expenditure grew 6.4% year-on-year. 

The company said this is largely due to annual salary increases, spending on technology and rising regulatory and compliance costs. 

“The JSE delivered a stable performance in the first half of 2024 with 4.2% growth in operating income and net profit after tax flat at R492.7 million, despite lower equity trading activity,” CEO Leila Fourie said. 

“These results reflect the benefit of diversification across our business segments and asset classes, alongside progress in growing non-trading revenue.” 

The company did note that South African investors continue to take money out of the country in the pursuit of higher returns offered by global equity markets. 

Over the period, global investors also reduced their exposure to South African assets due to election uncertainty and the country’s poor economic performance. 

However, there are some positive signs that trading activity is picking up following the conclusion of South Africa’s election and the formation of a Government of National Unity (GNU). 

“After a slow start to 2024, value traded in our equity market recovered in Q2, with the trend extending into July,” Fourie said. 

“Higher trading activity has been underpinned by positive market sentiment stemming from the outcome of the National Elections and the formation of the GNU.”

Elevated trading volumes will benefit the JSE Ltd. by driving up revenue and, ultimately, profits. 

The company has begun implementing a strategy to reduce its reliance on trading revenue by diversifying its income streams. 

This resulted in strong growth from its JSE Investor Services and Information Services business units. 

“Overall, we are pleased with the progress we have made as we continue to improve our infrastructure performance over time through innovation and collaboration,” Fourie said. 

JSE’s lost decade

A major reason why investors and companies continue to look beyond the JSE is its poor performance relative to other equity markets around the world. 

Local and foreign investors have taken billions out of South African assets while companies continue to delist from the bourse. 

Sanlam’s Thobile Ngcobo and Matimu Ngobeni recently outlined how retirement funds have benefitted from a change in regulation, allowing them to invest more of their assets offshore. 

They also revealed just how significantly the JSE has underperformed its global peers in the past decade, which will lead to asset managers increasing their offshore exposure in the coming years. 

Following an amendment to Regulation 28 of the Pension Funds Act in 2022, South African retirement funds swiftly invested billions of rands outside of the country. 

For example, Sanlam’s balanced fund increased its offshore allocation from 24.8% at the beginning of 2022 to 38.3% less than two years later. 

This has resulted in better outcomes for South African investors as they managed to capture the strong appreciation in global equities since 2022, Ngcobo and Ngobeni said. 

Portfolios consisting solely of local assets have underperformed those with an allocation to offshore assets. 

For instance, Sanlam’s global balanced fund outperformed its local counterpart by nearly 2% in the past ten years. 

When the performance of local equities versus their global counterparts is isolated, this differential is markedly worse. 

The difference in the growth of R100 invested in the JSE All Share over the past decade and the MSCI All Countries World Index is shown in the graph below.