28 September 2023
The declining number of companies listed on the JSE has been well documented over the past number of years. In this snippet, we compare this to some other parts of the world and look at how it impacts investor portfolios.
The shrinking number of listings is a global phenomenon, although it is very pronounced in SA. Over the past 20 years, based on data from the World Bank and the World Federation of Exchanges, the number of domestic stocks listed in the USA, UK, Brazil, and South Africa has all declined. Over this period, South Africa has seen the largest decline, and the past three years seem to have seen this trend reverse in other parts of the world; this has not been the case on the JSE.
Source: World Bank, World Federation of Exchanges
There are a number of reasons have driven this trend globally. An increasing cost and regulatory burden have driven many companies off listed exchanges or prompted them to stay private longer than in the past. The growth of venture capital and private equity, as well as low interest rates, have profited from alternative sources of capital. The JSE has also been exposed to these themes and, in addition, has faced falling investor interest and declining valuations in small-cap stocks, prompting management teams or external buyers to take companies private at cheap prices.
A dwindling universe of listed stocks raises potential concerns for investors. Does it become more difficult to generate attractive returns as the opportunity set shrinks? Does a lower number of listed stocks lead to more concentrated, less diversified portfolios for investors?
Source: JSE, Mergence Calculations
While the number of stocks in this index has also declined from over 160 to under 130 over the past two decades, the concentration of the index has not materially changed.
The 50 largest stocks made up 91% of the All Share 20 years ago, and they make up 90% today. The share of the index outside of the largest 100 counters has only declined from 1.8% to 1.4%.
Source: JSE, Mergence Calculations
Certainly, a shrinking pool of smaller capitalisation stocks reduces the opportunity set for active managers, especially smaller funds and retail investors, but for large portfolios and index-driven investors, the practically investable universe on the JSE has not reduced nearly as much as the overall number of listings suggests.
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