The Johannesburg Stock Exchange (JSE) has faced significant challenges over the years, particularly in the form of a shrinking number of listed companies. From a peak of 669 listings in 1998, the JSE has seen a decline of over 50%, with fewer than 300 companies currently listed. This reduction is attributed to factors such as increased regulatory costs, challenging economic conditions in South Africa, and strategic moves by companies to pursue delisting in Favor of private equity opportunities.
The decline in new listings, particularly after the 2008 global financial crisis, has exacerbated this trend. While the JSE attempted to rejuvenate the market with platforms like AltX for small and mid-sized enterprises, delisting’s have continued to outpace new entries. The impact of these delisting’s is a more concentrated market, dominated by a few large companies, especially in sectors like commodities and tech, with major players like Naspers and Prosus holding significant weight.
This concentration poses a challenge for investors seeking diversification within the JSE. Relying solely on a limited number of stocks or sectors can increase exposure to specific risks, especially in a market facing economic headwinds. As a result, diversifying into offshore markets has become increasingly important for investors looking to mitigate risks and enhance their portfolios.
In contrast, other major global exchanges like the New York Stock Exchange (NYSE) and the London Stock Exchange (FTSE) have also experienced shifts but maintain a broader investment universe. The NYSE, with over 2,000 listings, remains a leader in market size and depth, benefiting from a robust U.S. economy and access to a large investor base. The FTSE, representing the UK market, has also faced some delisting’s, especially after Brexit, but it still hosts around 1,900 companies
The JSE’s market capitalization, while substantial, falls short when compared to larger global exchanges. For example, the JSE has a market cap of around R7.9 trillion (roughly $400 billion), while the NYSE’s market cap exceeds $25 trillion. To put this into perspective, the JSE accounts for only about 0.40% of the global investment universe. Listing requirements also differ between the two exchanges. The NYSE requires companies to have annual revenue of at least USD 100 million (about ZAR 1.7 billion) and a minimum market capitalization of USD 200 million for existing companies or USD 40 million for IPOs. In contrast, the JSE does not have a specific revenue requirement and requires a minimum market capitalization of ZAR 500 million (around USD 26 million). As a result, companies that list on the NYSE tend to have significantly higher market capitalization, more stable revenue, and are generally about twice the size of those listing on the JSE.
This disparity in scale means that South African investors are exposed to a more concentrated market, with a few large firms like Naspers and Prosus dominating a significant share of trading volumes. In contrast, the NYSE and FTSE provide a broader range of sectors and industries, offering more diversification opportunities for investors.
Given these dynamics, it is crucial for investors to consider offshore investments for diversification. Accessing global markets allows investors to mitigate risks tied to the local economy and political uncertainties. By investing internationally, investors can gain exposure to industries not well-represented on the JSE, such as technology and consumer goods sectors, which are more robust in the U.S. and UK markets.
Offshore investments also provide exposure to different currencies, which can be beneficial in protecting against the volatility of the South African rand. The JSE’s struggle to maintain its listings is not unique to South Africa; many global markets have seen declines in the number of public companies due to the rise of private equity and venture capital. Yet, the extent of delisting’s in the JSE underscores the need for investors to look beyond local markets and consider global diversification as a strategic part of their investment approach
For investors navigating this environment, the focus should be on creating a portfolio that includes both local and international exposure to capture growth opportunities while managing concentration risk. This approach can help leverage potential gains from undervalued South African stocks while benefiting from the stability and growth of global markets.
