Company delistings on the JSE have prompted apprehension among South African members of the investment community, raising concerns about the potential impact on investor sentiment.

At its peak, the JSE listed over 600 listed companies in the early 2000s. However, as we entered Q1 2023, this figure declined to 301. While delistings are not unusual, the primary concern stems from the sluggish rate of new company listings due to the decelerating local economy.

A sign of economic challenges

According to Meryl Pick, Head of Research and Portfolio Manager at Old Mutual Investment Group (OMIG), this could signify a greater challenge within the South African economy, emanating from slower economic growth, thus making it more difficult for current businesses to find sustainable growth and new firms to scale.

Pick explains that typically, companies list on capital markets to raise capital, to expand the growth ambitions of the businesses that can’t be facilitated through the company's current balance sheet and where borrowing isn’t feasible. But, she adds, “Initial Public Offering (IPO) activity has decreased since the early 2000s with the trend of new listings through unbundling taking dominance.”

Going public vs staying private

Recent listings like MultiChoice, Zeda and Thungela Resources have unlocked more value for shareholders through independent listings versus the value they offered under their holding or investment companies like Naspers, Barloworld and Anglo American. While this opens avenues for investors to direct their capital, the scope and breadth of company sectors is not enough.

Pick adds that this is particularly true for the small- and mid-cap companies on the JSE.

“The burden and governance requirements have increased, and this comes with a heightened level of expense for the businesses. Private holding companies can be simpler and cheaper to run in this instance,” she says.

In early 2022, several reports raised concerns regarding the increasing number of mid-cap companies which were likely to delist from the bourse. This is a challenge that the JSE itself understands and is reported to be working to resolve with National Treasury. While the retention of mid-cap companies is a critical growth point for the JSE, it’s the top 100 companies that are of more relevance to institutional investors.

The impact: institutional investors vs retail investors

“Institutional investors are often limited to investing in larger companies in order to manage liquidity risk given how much capital they have to allocate,” says Pick. 

She explains that while the wider scope of sectors and industries in small- and mid-cap companies is welcome, it remains unfeasible for large institutional investors to allocate a meaningful stake of clients’ capital to this market segment given that doing so would result in owning inappropriately large stakes in the underlying companies. This is unfortunate as key themes such as the rise of renewable energy are more accessible in the small- and mid-cap space. 

“This is not the case for retail investors though as the amount of capital that they can invest is less significant relative to the market capitalisation of listed small- and mid-cap companies,” adds Pick.

Economics at play

Of late the JSE has witnessed the delistings of companies like Steinhoff, Distell, Massmart and Royal Bafokeng Platinum, for varying reasons. These firms have all been formidable in providing the liquidity and depth of economic scope required by institutional investors. The spate of increased dual listings and entities pursuing business abroad has also added to the concern around the competitiveness of the local stock exchange, also underscoring the concern around the slowing rate of economic activity in a market like South Africa. This not only makes it difficult to list on the local bourse but also to foster the growth of businesses in the domestic economy.

South Africa’s economy faces many macroeconomic challenges such as low GDP growth, lack of infrastructure investment and maintenance, corruption and slow changes to structural reforms. This has resulted in waning confidence, capacity and support to bolster the growth of existing businesses and the development of new firms for institutions and individuals to invest in.

While the country’s macroeconomic challenges are likely to remain in the short to medium term because of global and domestic factors, Pick says all is not lost for investors, particularly retail investors.

She says the South African regulatory framework safeguarding the interests and investments of pension-fund holders is regarded as being on a par with the best in the world. As such, retail investors and investors in pension funds can be assured that the delistings don’t result in a loss of capital on their part.

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