Why South African companies are fleeing the JSE

Several factors are contributing to an exodus of companies from the Johannesburg Stock Exchange (JSE), including onerous regulations and the discouragement of foreign investors.

This is according to Counterpoint fund manager Piet Viljoen and Austin Lawrence Gidon CEO Marius Strydom.

A BizNews analysis from November 2020 found that the number of stocks available on the Johannesburg Stock Exchange (JSE) has roughly halved since the year 2000.

Since the analysis was published, over 20 other companies have delisted from the JSE.

One of the most recent was Adapt IT, which delisted after being acquired by Canadian software company Volaris Group.

Speaking to BizNews in separate interviews this week, Viljoen and Strydom agreed that money flowing into index funds was a major factor discouraging local companies from remaining on the JSE.

Piet Viljoen, portfolio manager at Counterpoint

“All those funds do is buy the large companies, so smaller companies get completely neglected,” Viljoen stated.

“If you do a small-cap listing, you get no traction because the index funds are just not interested in buying small companies.”

Money has also been flowing to the large fund managers, and Viljoen said they don’t care about small companies either.

Viljoen also highlighted onerous regulatory requirements as a reason companies delist or choose not to list. However, this is a global phenomenon.

“In terms of compliance and accounting standards — it has become burdensome to be listed anywhere in the world, not only South Africa,” he said.

“The rules and regulations have become very onerous. The accounting standards have become almost ridiculous if you look at what they make you do these days with regard to fair value accounting and all those sorts of things.”

As a result, Viljoen said delistings are increasing globally.

Strydom said lack of analyst coverage for small and mid-cap stocks is an issue.

“They are not seeing the benefits of being listed if they are not being talked about,” he said.

Marius Strydom, Austin Lawrence Gidon CEO

Another important factor is foreign shareholding on the JSE, said Strydom, who said too-strict exchange control regulations keep them out.

“They are, most of the time, the marginal buyers who push demand for South African companies up or down,” he stated.

“If they have more demand for our companies, the JSE’s rating increases. But if they are selling out of the JSE, then the rating decreases.”

Strydom suggested that the JSE find different ways of promoting research in its stocks to solve these issues.

“Many international bourses — the [German one] is a good example — partner with research providers to provide coverage on undiscovered segments of the market. That certainly is one way of doing it,” stated Strydom.

“You also need to find a way of getting the more interesting, exciting companies on your platform. But you have to offer them more than simply a place to trade the shares,” he said.

“These companies must find improved access to capital and improved visibility through the listing. We have got many alternative bourses now as well in South Africa, and I think there is going to be a push for these alternative bourses.”

Now read: Top tech shares on the JSE in 2021 — including two which had over 170% growth

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Why South African companies are fleeing the JSE