Two major trends that can add some fire to SA’s investment blues

Focus on Asia and rise of actively managed ETFs mean better liquidity and more investor choice

With increasing regulatory oversight in the financial services sector, a wave of delistings and the everexpanding range of new technologies, financial services businesses across the globe are faced with the challenge of having to reinvent themselves.

It is well documented that exchanges are struggling with the loss of primary equity listings and liquidity on their bourses, while at the same time we have seen a significant increase in the number of exchange traded funds (ETFs). Away from the debate over passive and active investing, the evolution in this space is creating interesting opportunities in the financial services sector across both the passive and active spaces.

While the SA securities market has been negatively affected by almost R1-trillion in outflows over the past eight years, we think technology investments within the financial services ecosystem — including stockbroking — will be a key contributor to changing the landscape for the better.

There are two major trends taking place that may positively influence the local financial services sector. As equity markets continue to evolve and these trends play out, businesses that invest in their technology capabilities should be well positioned to develop new products and services to benefit from these shifts, and in so doing open up new opportunities for their clients.

The first trend we expect could affect the local market is an increased focus on Asia and other emerging markets (EMs). Recent research from Goldman Sachs shows that the market capitalisation of EM economies will grow faster than their developed market peers, with EMs making up 35% of global equity market share in 2030 and 47% by 2050. China and India are expected to lead this drive.

Why is this important? While local investors have been able to go offshore for a while now, many SA investors have focused on the US, UK and parts of Europe. A revival in EMs will likely result in multiple opportunities for investors in markets outside the traditional developed markets that investors typically gravitate to.

In the SA context this is an important development. It has been well publicised that the underperformance of the JSE relative to its US counterparts has had a material effect on the ability of local investors to grow their wealth. This outperformance by the US markets — specifically technology players — highlights the importance of being able to access growth markets, whether by way of various financial products or owning the markets directly.

By opening up the investment universe — both from a geographic perspective but also from a product perspective — investors have greater opportunities to grow their wealth. SA financial services firms in turn can innovate around the products and services they offer their clients.

To support this, in November 2023 the JSE announced that it was exploring the opportunity for secondary listings on the JSE for Hong Kong Exchanges and Clearing, part of the broader JSE “Asia strategy”. This aims to stimulate dual-listing structures and open investment opportunities in Asia to SA investors and vice versa.

How this specific strategic initiative plays out remains to be seen, but this move from the JSE is indicative of the types of initiatives and out-of-thebox thinking that will be required to open new markets to investors.

A second trend is the rise of passive and “active-passive” investment products. In January it was announced that according to Morningstar data, passive investment products had globally surpassed the number of actively managed funds.

While we acknowledge the role passive investment products play in portfolio construction, the introduction of actively managed ETFs (AMETFs) in SA is an innovative development. There has been a positive response to the range of products that have listed over the past few months as they improve liquidity and options for investors, from retail participants through to larger wealth managers.

AMETFs allow fund managers to list their actively managed funds on exchanges and compete with ETFs in terms of the tradability of the underlying instrument or fund. In a world where liquidity seems to be drying up, these instruments may well improve liquidity on exchanges given the active nature of these ETFs as investors are able to move seamlessly between funds, on exchange, triggering the need for trading.

Let’s assume you have a traditional stockbroking portfolio that includes blue chips such as Sasol and Naspers, and you want to blend in traditional passive investments via an ETF. But at the same time you want to incorporate an active element in the form of a unit trust. Through some of the new tools and products such as AMETFs, investors are now able to do this.

Wealth managers themselves can be linked income service provider (LISP) platform agnostic, and access a combination of ETFs and unit trusts, easily navigating a complex landscape of regulatory compliance and multiple technology providers.

To bring these types of products to market requires technology investment, but it also requires exchanges and regulators to allow market participants the room to create additional financial products to the benefit of the end investor. Ideally, the industry wants to see greater deal flow while removing red tape and administrative burdens that discourage product innovation.

Importantly, these are not investments limited to simply supporting the JSE ecosystem, but are extended to the likes of A2X, which is playing a key role in improving liquidity and reducing costs in the SA market. Prescient Securities recognised this opportunity early on and were one of the first agency-only local brokers to make the investment in the necessary infrastructure to be able to seamlessly trade and settle across both exchanges.

Change and innovation in the financial services market is inevitable, and with new products such as AMETFs coming to the fore, it is important to encourage continued investment in technology infrastructure to support investors and open the investment ecosystem to innovation.