The number of listings on the JSE is down by more than half since the 1990s, and the bigger companies on the JSE are often dual-listed on overseas exchanges to access cheaper finance in places like London and New York. That in turn reduces the free float or the available universe of investible stocks on the JSE. For smaller or medium-sized companies, the costs of listing are often cited as reasons for leaving the
exchange. How has the landscape changed throughout the years?
If you go back to the 1990s, the JSE had roughly 850-odd companies listed. So there was plenty of choice for investors. Over time we have seen this number decline quite sharply. It
moved to roughly 400 around 2012, so essentially halved; and the number is now under 300. It is evident that things are going in the wrong direction in terms of investor choice.

Why are we seeing this trend on the JSE?
Various components feature in this. If you look at some of the complaints from businesses that have delisted, these normally revolve around the significant costs associated with things like compliance, reporting, legal and administrative requirements. Being a listed entity, with all the obligations that come with that, puts a lot of short-term pressure on board members in
particular – and on the businesses more broadly – to keep on performing quite well. As we know, equities are generally a long-term investment, so that short-term pressure also
somewhat disincentivises businesses. I've also mentioned that the regulatory components, including the Financial Sector Conduct Authority and other regulatory bodies, go through a lot of effort to ensure that investors can invest safely. But obviously, they do run into a risk of
overregulating and making it unattractive to businesses because the reporting requirements are often rigid and significant.

Typically, investors will start to weigh the benefits versus the drawbacks, and so too will the businesses that are looking for funding on the JSE. And it seems like the balance is out of kilter at the moment. The other thing that is more broadly cited is that market conditions haven't been favourable. The JSE has been struggling and it's not the most obvious place to come and look for funding if you're a small business, given all the constraints and the macro backdrop that we've seen. I think it's also worth mentioning, though, that we have seen some popular South African companies being acquired by foreign investors. Thus, if we go back to Heineken and Distell, Pepsi, and Pioneer, for instance, in those particular circumstances, it is because foreign investors saw value in those companies and were able to effectively acquire them at extremely favourable values. So I think there's a combination – from very practical things like the examples I've just mentioned, and things more broadly around the onus on these businesses to ensure that they meet all the requirements from regulators
and the required laws.

How are investors interpreting these events, and is there a chance that this trend could reverse at some point?
I think the main narrative out there from investors is that there's a declining opportunity set and, as investors tend to do, they extrapolate the recent past into the future. If this decline
is set to continue, the view is that we will run out of investment options and it becomes impractical to build portfolios on the JSE. Therefore, investors are looking abroad to find other investment options.

What I think is potentially a mistake is that the interpretation is often that the delisting is linked to the economic struggles that we've been facing. Although that is a component within the reasoning, I don't think it's as simple as that. There's definitely some valuable context provided by the global trends we've seen in terms of listings and delistings.

Delisting does seem to be an international trend, and we hear similar stories coming out of London and elsewhere. But are things worse on the JSE and, if so, why is that?
I think what we've seen from a global perspective is that things are quite bad in terms of the number of delistings. Many exchanges are struggling with the same issue. If you look at
places like Luxembourg and Frankfurt and the London Stock Exchange (LSE), even in the US, there's a big delisting trend happening. I think what investors tend to do locally is think this is a very South African-specific thing, given the challenges that we've seen – but we are essentially just echoing some of the similar changes that we've seen across the globe. And if you look at the reasoning and why this is happening, like I said, often what is cited is the heavy burden from a compliance perspective, and it just makes it unattractive for companies to look for funding on the different exchanges. South Africa's case hasn't been bad. I mentioned before that it has been quite severe in terms of the delistings going from 850 to just under 300 – but if you look at some of the other exchanges, we've seen similar numbers that might surprise investors.

If you look at the LSE, for example, it has not only seen a number of delistings, but it has actually seen the aggregate value of the market decline. In that specific case, the aggregate
market capitalisation of the LSE went to US$3 trillion in February this year. But it used to be significantly above that level.

In South Africa's case, we've seen the number of delistings rise, but that trend has been quite stable over the past 10 years. It hasn't accelerated, but the problem that we face is that there aren't any new listings. So there isn't an offsetting component within that to come through.

I think if you listen to some of the other narratives going around, people feel quite comfortable investing abroad because South Africa's market cap weighting within the MSCI World Index has declined. The same thing has happened on the LSE. It used to be around 11% of the MSCI World Index, and today it's around 4%. I think what we can attribute that to is where US markets have been favoured; but even in the US we've seen the number of listings go down from 8 000 to 4 000 across the different indices, and that's been a trend also from the late 1990s.

So yes, South Africa's case does seem quite severe, even on a relative basis, but there are definitely areas in the market that are seeing numbers that do make your eyes water a bit.

What does the future hold for the JSE and for local investors?
The common issue here is the burden that comes with being a listed entity and all that's required to raise capital on public markets.

The JSE has launched different initiatives to try and simplify things – from going into plain-language documentation, for example, to supporting businesses better to comply with regulations.. That's very similar to what we've seen globally. Everybody's talking about how we can simplify things without putting clients at risk and oversimplifying – and introducing risk in that fashion.

Therefore, I think from a South African context, yes, it has something to do with the sentiment in the market more broadly. We expect that if interest rates come down, we should see a better appetite for listing, but we have to see some improvement in terms of the burdens I've been mentioning first.

It seems like the JSE is very aware of this and is also communicating with the broader community and investment space around the initiatives that they're trying to introduce to
entice investors to come to the JSE and look for opportunities – and, on the other side of that, to make it easier for businesses to be on the exchange. Therefore, I don't believe there is enough proof to say that adequate adjustments have been made and that a reversal will occur. We do see a lot of uptake in private markets as well, where there are fewer demands, but I think things are moving in the right direction in terms of making sure things are a little easier on everybody involved.

I think the proof is in the pudding. But more importantly, the dangerous narrative that is out there at the moment is that the JSE will in the fullness of time be ultimately irrelevant or
uninvestible, simply because there won't be a sufficient number of options available. I doubt that will be the case. I think there is still more than enough opportunity on the local bourse. You don't need thousands of stocks to build a decent portfolio. At the same time, if we can get some of these other requirements out of the way, make it a little bit easier on companies, I think that will be supportive for the JSE as well. But we'll only know that in the fullness of time.

You can listen the full recording here.

Catch up on previous Think Big Series where Sanusha Naidu, Foreign Policy Analyst, discussed everything elections 2024. From potential coalitions, predicted outcomes and possible impact on SA. Watch the recording here.

In this edition of the PSG Wealth Employee Benefits Monthly, we bring you highlights of a recent Moneyweb podcast with our Chief Investment Officer, Adriaan Pask on understanding the current delisting phenomenon on the JSE.