JSE delisting headache

The JSE has been hit hard with delistings as companies search for cheaper finance and looser regulations elsewhere, leaving South African investors with a shrinking pool of stocks.

This is according to Adriaan Pask, Chief Investment Officer at PSG Wealth, who said that the number of listings on the JSE has declined by more than half since the 1990s. 

“Today, many of the larger companies on the JSE are dual-listed on overseas exchanges, such as those in London and New York, to access cheaper finance,” he said. 

“This dual-listing trend reduces the free float or the available universe of investible stocks on the JSE.”

In the 1990s, the JSE had approximately 850 listed companies. This number dropped to around 400 by 2012 and has now fallen below 300. 

“This decline is attributed to several factors such as significant costs associated with compliance, reporting, legal and administrative requirements,” Pask said.

Being a listed entity comes with obligations that exert short-term pressure on board members and businesses to perform well consistently.

Equities are generally a long-term investment, and this short-term pressure can disincentivise businesses.

“The reality is that while the JSE’s world-class regulatory environment ensures investor safety, overregulation can make the market unattractive to businesses due to rigid and significant reporting requirements,” Pask said.

Investors and businesses need to consider their listings carefully. Currently, that evaluation does not favour the JSE. 

Market conditions have also not been favourable. “The JSE has been struggling, and it’s not the most obvious place for businesses to seek funding.”

This environment has resulted in popular South African companies being acquired by foreign investors and delisting. 

Examples include Heineken acquiring Distell and Pepsi acquiring Pioneer. These acquisitions occurred because foreign investors saw value in these companies and acquired them at favourable prices.

The other reality is that the declining number of listings on the JSE means fewer investment opportunities, leading investors to look abroad for alternatives.

Pask explained that a common misconception is that these delistings are solely due to South Africa’s tough economic environment. 

“While the local environment plays a role, delistings are a global phenomenon, affecting many exchanges from Frankfurt to New York,” he said.

“A key reason for this trend, as is the case for the JSE, is the heavy compliance burden, which makes stock exchanges less attractive for funding.”

This can be seen in the London Stock Exchange (LSE), which has seen several delistings and a decline in its aggregate market capitalisation.

In the US, the number of listings dropped from just over 8,000 in 1996 to around 4,000 today, with valuations now concentrated in the mega-cap space.

“In the JSE’s case, we’ve seen the number of delistings rise, but that trend has been quite stable over the past 10 years. However, while the trend hasn’t accelerated, the reality is that there are no new listings coming through,” he said.

The JSE is aware of these challenges and is actively communicating with the broader community and investment space about initiatives to attract investors and make it easier for businesses to list, Pask explained.

This includes initiatives to simplify processes and cut the red tape, such as plain-language documentation and compliance support. 

He said the challenge is simplifying without compromising investor safety. “While there is no concrete proof that adequate adjustments have been made to reverse the trend, the JSE’s efforts are a step in the right direction.”

As part of their efforts to reverse the delisting trend, the company aims to create new partnerships with exchanges in Southeast Asia, with the JSE hoping to attract new dual listings. 

Last year, the JSE announced that the Financial Sector Conduct Authority had approved amendments to the JSE Listings Requirements regarding financial reporting disclosures, among other things.

The amendments to this regulation aim to achieve the following –

• Simplifying the provisions in general.
• Removing the previous obligation to always prepare an abridged report.
• Limiting the need to prepare an IAS 34 format set of results only if the detailed audited annual financial statements are not available for public consumption electronically.
• Removing the previous obligation to obtain an auditor’s opinion on interim results published where the previous annual results were published, accompanied by a modified opinion.

“Looking ahead over the medium-term, it’s PSG Wealth’s view that if interest rates decrease, we might see some appetite for listings. However, improvements to lighten the regulatory burden are necessary,” Pask said.

The global delisting trend has also resulted in increased activity in private markets due to decreasing demand. “However, it is our view that there is still significant opportunity on the JSE,” he said.

“One doesn’t need thousands of stocks to build a decent portfolio. Simplifying requirements will support the JSE, but the impact will only be known over time.”