Momentum: JSE needs new listings

South Africa's investment universe has experienced a significant contraction over the past two decades. The Johannesburg Stock Exchange (JSE) has seen a decline in the number of listed companies, with only 302 registered in the first quarter of this year compared to 484 two decades ago. This trend of shrinking exchanges is not unique to South Africa, as markets in the US, Germany, and the UK have also witnessed a reduction in listings. Eugene Botha, Head of the Research Hive at Momentum Investments Group, joined CNBC Africa to discuss whether this trend should be a cause for concern. Botha acknowledged that while there are challenges facing South Africa, the delisting trend may reflect the struggling local economy. However, he also attributed part of the shrinkage to a cyclical nature seen globally. Despite the decline in listings, Botha emphasized that the concentration of delistings has occurred mainly among smaller and fledgling companies, rather than impacting the core investable universe for South African investors. The consolidation trend has seen larger companies absorbing smaller ones, leading to an overall increase in the JSE's market valuation. Botha noted that while the top 10 companies in the JSE were previously dominated by resource firms, the market has become more diverse, with a broader range of sectors represented. Companies like NASPA offer exposure to international opportunities, allowing South Africans to invest in a variety of ventures beyond the local market. Additionally, the percentage of foreign primary listings on the JSE has grown significantly, from 4.3% to 20.4%. Botha attributed this trend to companies seeking to diversify their earnings globally, mitigate currency volatility, and tap into larger funding pools. However, the regulatory environment and the complexity of listing requirements in South Africa have posed challenges for companies. Botha highlighted the burdensome nature of compliance with stringent regulations, which can be costly and time-consuming. In response, the JSE has made efforts to streamline its listing rules, including allowing dual class share structures and simplifying financial reporting to make the market more attractive and accessible to potential listings. In terms of private equity exits, the JSE has not been the preferred platform for companies looking to exit. Botha suggested that private equity funding has been more appealing than listing on the exchange due to better value propositions elsewhere. However, the JSE is implementing changes to enhance its market appeal, such as reducing free float requirements and simplifying financial reporting. These adjustments aim to make the exchange a more viable option for companies seeking capital through listings. While the shrinking JSE raises some concerns, Botha believes that the market's current structure and resilience reflect a shift towards a more consolidated and diverse market, offering investors new opportunities for growth and international exposure. As the JSE continues to adapt and refine its listing requirements, the exchange may attract a broader range of companies and reignite interest in domestic listings, potentially reversing the trend of shrinking markets.