South Africa has a highly concentrated market – with big risks to investors

The top 10 shares on the Johannesburg Stock Exchange (JSE) make up 68% of the bourse, which means South Africa has one of the most concentrated markets in the world.

The JSE has seen a spate of delistings over the past few years. The number of companies listed on the bourse has dropped by more than half over the past 30 years.

Many top companies, including Massmart, Distell, PSG, and Clover, are no longer available to investors.

The high number of delistings and a lack of new large company listings on the JSE have created a highly concentrated market.

Vuyo Nogantshi from Allan Gray explained that South Africa has a small equities market with a handful of dominant shares, spread across a few sectors, that dominate.

The highly concentrated market skews many of the indexes and limits the number of shares local investors can choose from.

“Compared to global markets, the JSE is relatively small, comprising less than 1% of the total global investing universe,” Allan Gray said.

A recent analysis shows that the top 10 shares on the JSE account for 68% of the market size – the highest ratio of all markets which were compared.

The biggest companies on the JSE are dual-listed international giants like BHP, Anheuser-Busch Inbev, Richemont, Prosus, British American Tobacco, and Glencore.

In the United States the top 10 shares on accounts for the 32% of the market. It is even lower for Japan, where the top 10 makes up 26% of the market.

This shows South African investors should look at other markets to diversify their portfolios and get exposure to all sectors.

The technology sector, for example, has been booming over the last decade, with Microsoft, Nvidia, Amazon, Alphabet (Google), and Meta (Facebook) showing exceptional growth.

There are very few vibrant technology companies listed on the JSE, which means local investors would have missed out on this boom if they did not look beyond the South African market.

A2X CEO Kevin Brady said he is very concerned about the number of delistings and lower trading volumes seen on the JSE over the past few years.

“A shrinking pot is not good for anyone, even if we’re fortunate enough to be growing within the existing pot”, Brady told Daily Investor last year.

“Delistings and lower trading volumes are a concern. Continuous trade for August, September, and October 2023 versus the same period last year was down by 20%.”

Sasfin Asset Consulting’s head of advice, Johan Gouws, said the situation could pose a significant threat to South Africans’ retirement funds.

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

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

The market concentration also exposes retirement fund members and asset managers to liquidity risk.

The chart below shows the market concentration of prominent global markets compared to South Africa’s JSE.


Top JSE indices