Three months into the Government of National Unity (GNU), the JSE’s chief executive, Dr Leila Fourie (pictured), reports that the political shift has sparked a re-rating of South African assets, allowing investors to view their relative value in a new light.
Fourie shared her insights on the future of Africa’s largest stock exchange during the latest PSG Think Big webinar. She was in conversation with journalist Alishia Seckam, who hosted the discussion.
Kicking off the conversation, Fourie acknowledged that South Africa’s markets have been undervalued for some time, particularly compared to other indices, with indicators such as dividend yields and price-to-earnings ratios highlighting the gap.
“So, our shares are cheap compared to both developing and developed markets,” she said, pointing to international investors’ hesitation to invest because of challenges such low economic growth and the electricity crisis. She noted that this discount presents an opportunity as changes occur.
“We have seen signs of improvement in government bond yields and the strengthening rand,” Fourie added.
Patterns in capital flows have also notably shifted, according to Fourie. In May, during the election month, the country saw R32 billion in equity market outflows, compared to R12.9bn the previous year. However, since then, outflows have significantly declined, with R5bn in June compared to R20bn a year earlier, and only R1.8bn in July compared to R8.1bn the previous year. August followed suit, with R10bn, down from R24bn last year.
Investors who were underweight in South Africa are showing signs of rebalancing their portfolios, a positive shift for the market.
“And if we do deliver, there is a very real possibility that that could translate into an overweight position of South Africa, especially given how undervalued our stocks are to begin with,” Fourie said.
In discussing South Africa’s performance compared to other emerging markets, Fourie highlighted that the country’s markets have shown promising results.
“It’s very encouraging,” she said, noting that the FTSE/JSE All Share Index (ALSI) and the Top 40 Index have outperformed the MSCI Emerging Markets and World indices by about 9% since the formation of the GNU.
Additionally, local bond yields have demonstrated strong performance, with key benchmarks improving by about 13%.
Reflecting on the JSE’s progress, Fourie pointed out that during the first half of the year leading up to the elections, the ALSI rose by 1.3%. However, between June and the end of August, the index surged by 9.2%.
“We are seeing a significant improvement in growth post-election and in valuations,” she said.
Not all the positive developments can be directly tied to the GNU; global market trends have also contributed. Still, she said the GNU has played a significant role in South Africa’s strong performance relative to other emerging markets in the equity and bond sectors.
But will this be enough to shift listing activity on the JSE?
Although the JSE remains the continent’s largest and leading stock exchange, Moneyweb reported in November last year that the number of listed companies has declined to 287, down from 389 a decade earlier.
Fourie said as sentiment improves, investment demand may increase.
“We’ve already seen green shoots year-to-date in the number of listings. And this translates when we see a demand for investment into a demand for companies to raise new capital.”
Fourie said the healthier the economy, the healthier the demand for capital, and therefore the need by companies to seek listings, to raise capital.
“But there are also important structural reasons for the loss of listings that we’ve seen in capital markets across the world.”
She added there was also a greater demand for liquidity as pension savings have shifted to more of a defined benefit fund environment, which requires daily pricing.
“These factors all remain part of the equation, and they are driven by structural features and policy environments, but better economic performance will certainly encourage capital raising on capital and public markets,” Fourie said.
Levelling the playing field
Compliance requirements that are particularly expensive and onerous for small companies are among the reasons South Africa’s main stock exchange has been losing listings.
In April, the JSE proposed to ease some of its listing requirements to reduce the costs for small and medium-sized companies
Read: JSE unveils proposals to reduce regulatory burden on smaller companies
In early August, the JSE announced a new market segmentation for its main board, featuring a two-tiered approach. About 115 companies outside the ALSI will qualify for the general segment. This segment introduces a tailored listings regime aimed at reducing barriers for smaller companies seeking capital. Significant changes include streamlined requirements for share issuances, fairness opinions, and historical data, along with simplified annual financial reporting.
In recent months, the JSE has also significantly expanded its secondary listings framework. Initially, the JSE fast-tracked dual listings for seven exchanges. However, the framework has grown to include an additional eight exchanges, adding key markets such as Saudi Arabia, Euronext (Amsterdam, Paris, Brussels), Dublin, Milan, Lisbon, and Oslo.
“This opens up the opportunity for our local investors to access multinational dual-listed companies,” Fourie said.
She said these changes have been well received by the market.
Regulation 28 – fostering a dual-listing environment
The increasing number of delistings over the years has raised concerns about the risks for South African investors, particularly retirement funds. This has sparked considerable debate about Regulation 28 and the potential for the JSE to alleviate some of its constraints.
Fourie highlighted that, despite Regulation 28 requiring investors to keep 55% of their assets onshore, the JSE has fostered a robust dual-listing environment. With more than 30% of its listed companies also listed internationally, the JSE provides local investors with opportunities to tap into global growth trends.
In addition to this, and the JSE’s fast-track listings regime, Fourie said the JSE was expanding the scope of investment opportunities.
“For example, we’re seeing a surge in ETF and structured products.”
The JSE listed six actively managed certificates, providing investors with access to local and offshore equity strategies, in September last year.
The listing of the ETFSA Balanced Foundation Prescient AMETF on 26 August brought the number of ETFs listed on the JSE to 107 with a market capitalisation R178bn.
“Our actively managed certificates and actively managed ETFs have enjoyed tremendous support,” Fourie said.
She added they were also seeing a continued growth in the country’s debt space, “particularly relating to sustainability and social and green bonds”.
A GNU beginning
What should be the new government’s priorities to unlock South Africa’s economic potential? According to Fourie, the feedback from global investors needs to be considered.
“They’re saying they want policy certainty. They want growth. They want execution and delivery, particularly regarding electricity, unemployment, and the logistics crisis we’ve faced.”
She noted that promising reforms have begun in the electricity and power security sectors, alongside indications of collaboration between the public and private sectors in logistics.
“We hope these developments will translate into growth. From a government perspective, I would say we need a functioning GMU, policy stability, and effective execution of our policy promises.”
