Could opportunities in overcoming SA’s woes be the answer to JSE’s liquidity challenges?

The JSE in Sandton, Johannesburg. Picture: Timothy Bernard Independent Newspapers

The JSE in Sandton, Johannesburg. Picture: Timothy Bernard Independent Newspapers

Published Feb 2, 2024


By Mohamed Dhorat and Olivia Vaughan

As 2024 kicks off, financial professionals in South Africa must contend with a formidable risk: critical infrastructure failure. The Allianz Risk Barometer reveals that this threat has claimed the top spot for the second consecutive year, as reported by 3 000 risk management professionals.

The findings underscore the profound impact of power outages and infrastructure breakdowns on the nation’s economy and businesses.

These blackouts extend beyond mere supply chain disruptions, significantly affecting the broader economy. Failures in crucial infrastructure elements such as ports, railways, and roads present formidable challenges for businesses. Consequently, companies are redirecting their focus towards investments in infrastructure resilience and the formulation of contingency plans to counter potential consequences.

Is liquidity affecting the relevance of the JSE?

The number of companies listed on the JSE has fallen from circa 800 to about 300 over the past 30 years. This evidently shows that the investment universe by number of companies has been decreasing, although the overall size by market capitalisation of companies listed on the JSE has significantly increased.

Effectively, those companies that have remained listed have in aggregate grown and that new listings have added more market value than what has been lost due to the de-listings.

The savings pools held by life companies and collective investment schemes have decreased significantly to circa R6 trillion, the primary driver being real household income growth decelerating continuously from the 1980s.

The two-pot retirement system that will come into effect in March 2024 aims to alleviate the economic strain on households, but has the unintended consequence of draining liquidity further.

Daily value traded on the JSE has fallen from circa R20 billion per day just two years ago to around R15bn per day more recently, with certain days as low as R10bn ($500 million value traded on a day for the bourse).

There are days when Anglo American, with a market cap of R560bn, only trades R300m of value up until before the closing auction. This makes trading near impossible for larger positions outside of the closing auction. In addition, non-residents have dis-invested about R400bn from the JSE between January and September of 2023.

What are the reasons?

– The lost decade of the Zuma years: a tumultuous political and economic environment for businesses, civil society and financial markets.

– Technical factors like passive investing flows, which are very cost efficient for savers. These flows have a positive feedback loop, enabling large companies to become larger and smaller companies eventually dwindle into the abyss of irrelevance from the perspective of ever being able to qualify as a member of the indices that dictate these passive flows.

Furthermore, performance by active managers has also been dismal, which further exacerbates the above trend. A majority of the above issues can be explained by easy money flows driven by quantitative easing policies by global central banks over the last decade.

– Market caps of companies that are less than R10bn make them potential candidates for being de-listed as these are often very good businesses, with great fundamentals, cheap valuations and dynamic management teams that are totally ignored due to their size and liquidity, allowing for value to be transferred to local trade buyers, foreigners or private equity.

– Covid-19 and the disastrous impact that it had on certain sectors of the economy.

– The cost of compliance and red tape of the regulatory environment becomes disproportionate once some of the above factors are taken into account.

Is there light at the end of the tunnel?

Infrastructure challenges faced by South Africa in the electricity, water and logistics sectors present a compelling opportunity for new and innovative businesses to solve problems that will undoubtedly require capital.

Perhaps, we start to see a new listings boom in the debt and equity capital markets, as well as innovation in financial products that will only work to create deep, broad and liquid financial markets for both the JSE and South Africa. Perhaps some of our state-owned enterprises should look to privatise and list on the JSE.

Mohamed Dhorat, is the Chief Investment Officer at Black Mountain Investment Management (a majority black-owned investment manager) and Olivia Vaughan, a director at Westman Vaughan.