Shrinking JSE increases the risk for South African investors


The spate of delistings from the JSE over the past few years has led to market concentration risk, and South African investors must be very careful with their exposure to local assets.

This is according to PSG Wealth’s head of securities, Wendy Myers, who said the phenomenon of stock market delistings is not only restricted to South Africa.

However, the trend locally appears to be acute – the JSE has seen the number of listings more than halving from 616 in 2000 to just 284 at the end of 2023. 

She said this results from a confluence of global and local factors, with the big one being tepid economic growth in the local economy. 

South Africa’s economy grew by a meager 0.6% last year, and GDP growth was only 0.1% in the fourth quarter of 2023. The rand has also weakened by around 2% against the US dollar over the past year.

While many rand hedge companies with large international operations have been protected, this severely impacts the performance of companies with South African operations.

Myers said market concentration risk is the key implication of a shrinking investment universe on the JSE. 

The JSE is effectively dominated by a few market heavy-weights, including, for example, China-related internet counters like Naspers and Prosus and commodity stocks. 

In addition, valuations of JSE-listed companies are at an all-time low compared to international companies. 

Wendy Myers, Head of Securities at PSG Wealth

Despite the reduction in the number of single stock counters, the JSE has seen a rise in the number of exchange-traded funds (ETFs) listed on the stock exchange. 

However, investors should not assume that their portfolio will be suitably diversified if they only have JSE exposure via ETFs, Myers warned.

This is because these instruments effectively track an index and may, by extension, not provide as many diversification benefits as investors would assume.

“In general, when considering equity investments, it is very important to ensure your portfolio is well-diversified, and similarly, the JSE should not be your only form of equity exposure,” she said.

“International diversification is key, and investors need to consider exposure to other currencies and geographies in their portfolios.” 

PSG Wealth recommends allocating almost 40% of a total portfolio to international securities. 

In addition, despite JSE-listed companies’ low valuations, they are paying very attractive dividends.

“So, savvy investors can benefit from owning stocks with high dividend yields, and because of low valuations, they also provide upside potential if interest rates start to decline or economic conditions improve, even if off a low base,” she explained. 

“Thus, the potential upside for South African assets could be pronounced.”

However, she emphasised that stock selection is incredibly important when looking to exploit this opportunity. Investors must select stocks with high dividend yields and relatively low share price volatility. 

Investors should also avoid “value traps” and steer clear of companies with limited control over revenues and costs. 

“A long-term horizon remains essential, allowing dividends and market returns to compound effectively,” she said.

Concerns about JSE delistings 

A2X CEO Kevin Brady

Other industry roleplayers have also expressed concern about the high number of delistings from the local stock exchange.

A2X CEO Kevin Brady previously said he is very concerned about the number of delistings and lower trading volumes seen on the JSE over the past few years, as it could have a severe impact on South Africa’s investment industry. 

“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 are a concern, and obviously, lower trading volumes are a concern.”

“It’s quite scary, actually, if you look at continuous trade for the months of August, September, and October versus the same period last year – it’s down by 20%.”

Brady said this can largely be attributed to the country’s macroeconomic outlook.

He also believes the country lacks innovation and a more forward-looking regulatory regime that would allow industry roleplayers to do more to grow and compete in the market.

Head of investments at Morningstar South Africa, Sean Neethling, has also said the delisting trend raises concerns about the future of investing in local equities. 

“The shortage of new listings, the relatively weak performance of local shares and depressed levels of business confidence have further exacerbated fears among market participants,” he said. 

Neethling’s central concern is the level of market concentration and its impact on investment portfolios. The JSE is highly concentrated, with the Top 40 shares accounting for approximately 85% of the index.

He explained that a narrower market spells trouble for active asset management as it limits the universe of opportunities to generate returns greater than the index.

This is particularly worrisome for investors focusing on small and mid-cap domestic equities, as these kinds of businesses may not be listed in the future. 

These companies also trade with relatively less liquidity than the larger companies that make up the index and may take longer to attract the level of investor demand to generate expected returns.


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