Shrinking JSE increases risk for investors
J– The spate of delistings from the JSE over the past few years has led to market concentration risk and South African (SA) investors must be very careful with their exposure to local assets.
This is according to PSG Wealth’s Head of Securities, Wendy Myers, who said the phenomenon of stock market delistings is not only restricted to SA.
However, the trend locally appears to be acute – the JSE has seen the number of listings more than halving from 616 in 2000 to just 284 at the end of 2023.
She said these results from a confluence of global and local factors, with the big one being tepid economic growth in the local economy.
Rand
SA’s economy grew by a meager 0.6 per cent last year and GDP growth was only 0.1 per cent in the fourth quarter of 2023. The Rand has also weakened by around two per cent against the US Dollar over the past year.
While many Rand hedge companies with large international operations have been protected, this severely impacts the performance of companies with SA operations.
Myers said market concentration risk is the key implication of a shrinking investment universe on the JSE.
Dominated
The JSE is effectively dominated by a few market heavy-weights, including, for example, China-related internet counters like Naspers and
Prosus and commodity stocks.
In addition, valuations of JSE-listed companies are at an all-time low compared to international companies.
Despite the reduction in the number of single stock counters, the JSE has seen a rise in the number of exchange-traded funds (ETFs) listed on the stock exchange.
“However, investors should not assume that their portfolio will be suitably diversified if they only have JSE exposure via ETFs,” Myers warned.
This is because these instruments effectively track an index and may, by extension, not provide as many diversification benefits as investors would assume.
“In general, when considering equity investments, it is very important to ensure your portfolio is well-diversified, and similarly, the JSE should not be your only form of equity exposure,” she said.
Exposure
“International diversification is key and investors need to consider exposure to other currencies and geographies in their portfolios.”
PSG Wealth recommends allocating almost 40 per cent of a total portfolio to international securities.
In addition, despite JSE-listed companies’ low valuations, they are paying very attractive dividends.
“So, savvy investors can benefit from owning stocks with high dividend yields, and because of low valuations, they also provide upside potential if interest rates start to decline or economic conditions improve, even if off a low base,” she explained.