JSE’s mettle tested by crisis

Now the exchange focuses firmly on cementing its role after Covid-19

With about $18-trillion (R304.2-trillion) wiped off world markets in February and March, the enormous losses caused by the Covid-19 pandemic quite rightly dominated the headlines. Behind the scenes, stock exchanges themselves were working frantically to ensure smooth trading amid the chaos.

With about $18-trillion (R304.2trillion) wiped off world bourses in February and March, the enormous losses caused by the Covid-19 pandemic quite rightly occupied the headlines. Behind the scenes, stock exchanges themselves were working frantically to ensure smooth trading amid the chaos.

The JSE is no exception. For the first six weeks it was all hands on deck to ensure the performance of the market infrastructure. Now the JSE, which had its fair share of challenges before the coronavirus, is firmly focused on cementing its role in a postpandemic future.

Net outflows from the JSE topped R16.8bn over the past two months. The question now for Valdene Reddy, director of capital markets at the exchange, is whether investors will come back to the market in the coming six months — and what happens if they don’t.

“Many people have asked how the JSE will look after Covid-19. It’s new territory for all of us,” she says. “Everyone is still working together in terms of what it means for our businesses, what it means for our suppliers, what it means for our brokers, what it means for our listed companies.”

Already, two JSE-listed companies, Comair and Phumelela Gaming, hit hard by the nationwide Covid-19 lockdown, have gone into business rescue, a sort of bankruptcy protection provided by the Companies Act.

“It’s a very harsh reality in the current environment,” says Reddy. “What we ’ ve been trying to do is to pragmatically work through solutions for how we can respond.” But even before the pandemic, the JSE was feeling the effects of the sluggish SA economy, and it has been in the throes of a delisting crisis for some time now.

There are 250 fewer companies listed now than in 2000. Last year, 21 companies delisted. This trend continued into 2020.

Only last month. iron-ore miner Assore, which has been listed for 70 years, quit the bourse. Embattled construction companies Group Five and Esor will delist in June.

Johan Holtzhausen, CEO at PSG Capital, a corporate finance and advisory firm, says the pandemic will affect stock exchanges worldwide, but “for the SA economy, which already struggled before Covid-19, the pandemic will cause further harm, more so than for US and European exchanges, as we have already seen a number of companies, some of which are listed, that have gone into business rescue or have provided trading warnings.”

It’s the highly geared companies or small to medium listed companies that will struggle. “It will be a period of consolidation, mergers, disposals and delistings over the next one to two years,” Holtzhausen says.

New listings on the JSE were also few and far between before the pandemic. The JSE has had four equity listings this year, but all stemmed from some form of corporate action or name change.

The dearth of new listings is part of a global trend, Reddy say, though the World Federation of Exchanges reports some recovery, with 75 initial public offerings (IPOs) coming to market in the first quarter of 2020. But “it’s a new market as we stand right now ” , he says.

“There will definitely be a need for capital raise. There will be more potential for mergers and acquisitions, but in what form they come to market is really hard to know.”

The limited pipeline of new listings prompted the JSE to expand into African and Asian markets, though this effort is for the moment delayed, given the restriction of movement across geographies.

Despite its many challenges, however, the JSE may weather the Covid-19 storm better than many other markets. According to Holtzhausen, the JSE remains one of the best exchanges in the world, with well-developed capital markets and cash still in the system.

One advantage is that SA has a very large institutional base. “Our market is made up of asset managers and pension funds, a lot of them governed by mandates that have a high affinity to listed investments,” says Reddy.

“So there are also local opportunities for trade activity.”

The JSE has one of the world’s highest ratios of market capitalisation (R16bn) to GDP, thanks to the diverse operations of SA corporates, many of which have a lot of offshore exposure. That makes the JSE attractive as both a rand hedge play and a diversified market, Reddy says.

As a business, the JSE saw its profit plummet 23% in 2019, but Reddy insists the exchange has kept a lid on costs since a restructuring in 2016.

Still, Wayne McCurrie of FNB Wealth & Investments, says exchanges worldwide have to spend enormous amounts of money on IT and other costs to ensure their smooth running, but face thinning margins for the moment. “Look, it’s a tough environment, ” he says, “but it ’ s nothing a bull market won’t sort out.”That certainly doesn’t mean the JSE can rest on its laurels in anticipation of better days ahead. Rather, pressure is mounting on the exchange to be proactive and innovative to lighten the load of embattled companies.

RAISING CAPITAL

Former Investec CEO Stephen Koseff called recently for the JSE to amend its listing rules to allow companies to issue shares without the consent of shareholders — enabling them to quickly raise funds in times of crisis.

The JSE says it’s in talks with the Financial Sector Conduct Authority on measures to speed up the process of issuers raising capital.

“Ways of capital raise or alternative trading styles and strategies that could help provide some catalyst or impetus — that is very top, front and centre in terms of what we are thinking about and working on,” Reddy says.

Already the exchange has announced some relief measures, mainly for the benefit of small- and mid-cap companies. “That is really where capital injection will be necessary”for important, she funding says. shortterm cash flows and where operational resilience is quite

“I’m not saying that our larger companies won’t have the same concerns, but I think different issues for each segment will manifest over the next few months.”

The priority for the JSE now is initiatives that will move the dial.

“We want to be proactive in how we manage that either in product development or responsiveness in changing some of the short-term strictures that could facilitate the forms of capital options there are for the market,” says Reddy.

The JSE is also collaborating with market participants to respond to product demand. For example, it is seeing demand for social bonds, financial instruments for projects that address social issues, and also for environmental, social and governance (ESG) offerings.

“The focus was there before Covid-19 and even more so now,” says Reddy. “We are trying to stay relevant and have diverse products and respond to those needs.”

The JSE is optimistic that a healthy and diverse pipeline of offerings may come to market, especially as demand in the social bond and capital raise space builds. But “timing and opportunity has to align”, Reddy says.

Once the dust settles, Holtzhausen sees the return of more listings to the JSE as the economy improves or new business lines emerging from the pandemic gain traction. Ultimately, he says, there remains value in being listed. “It will be a tough time for the JSE but there will always be a place for stock exchanges.”

JSE HAS ONE OF THE HIGHEST RATIOS OF MARKET CAPITALISATION TO GDP, THANKS TO THE DIVERSE OPERATIONS OF SA CORPORATES