The JSE Securities Exchange (JSE) was established by Benjamin Wollan in 1887, with the goal of providing a platform for gold mining companies to raise capital to make the most of South Africa’s first gold rush. Following the introduction of the first South African legislation covering financial markets in 1947, it joined the World Federation of Exchanges in 1963 and upgraded to an electronic trading system in the early 1990s.
The JSE has more recently transitioned from an organisation owned and operated by stockbroker members to a company owned broadly by public investors and listed on its own exchange. Today, the JSE operates five financial markets: Equities, Equity Derivatives, Currency Derivatives, Interest Rates and Commodity Derivatives.
Local stocks in a global context
The South African stock market (equities) contains many companies with global revenue streams. A breakdown of the revenues of the companies within the FTSE/JSE Top 40 Index1, reveals that less than half of our market’s revenue was from outside of the country in the early 2000s. Since 2014, this has averaged about 70%, with the increase due to a depreciating currency, a slow local economy, inward listings, and local companies seeking diversification and making oﬀshore investments. Charted below (left) is a breakdown of company revenues, with those in the Top 40 Index earning around 30% from South Africa, 8% from across the rest of Africa and the Middle East, and the balance from further afield (right).
As Africa’s most developed economy with the most sophisticated financial markets, South Africa is sometimes considered an investment entry point to the continent. The South African companies included in the MSCI Emerging Markets Index command an index weight of 3.1% (as at 31 May 2023) and their constituents extend to companies just outside of our Top 40 Index. Its tail would typically be the point below which South African companies fall outside of the investable universe for foreign investors. Currently, this tail is made up of OUTsurance and Pepkor, which are among the top 50 companies in the FTSE/JSE All-Share Index.
1Typically consists of the 40 largest companies ranked by investable market value in the FTSE/JSE All-Share Index.
Market index dynamics
The JSE uses a market capitalisation-weighted methodology to determine individual stock weights within the FTSE/JSE indices. Additionally, weights are adjusted to reflect the respective company’s “free float”, ie shares that are available to be traded by the general public. Free float calculations attempt to exclude shares that are owned directly by the state, company oﬃcers, employee share schemes and those held as “strategic investments”.
The two major indices used most by investors are the FTSE/JSE All-Share Index (ALSI) and the FTSE/JSE Shareholder-Weighted All-Share Index (SWIX). The primary diﬀerence between the ALSI and the SWIX is their treatment of shares that are not accounted for on the South African share register, due to companies being listed on more than one exchange. For calculating the SWIX weights, any company that listed post October 2011 is subject to an exclusionary rule on non-South African shareholdings. This results in the ALSI being more heavily weighted to dual-listed stocks and consequently more concentrated in the very large stocks. The SWIX has higher weightings in locally registered shares and is therefore somewhat more diversified.
The overlap of the ALSI and the SWIX is indicated in the chart below (left). Following recent updates in company share structures at BHP Group (March 2022) and Richemont (June 2023), the more material index weight diﬀerences are now concentrated in Anglo American, Mondi and Investec. The overlap between the two is at the highest level it’s been in recent years.
Multiple listings – multiple trading opportunities
Having multiple listings enables a company to raise capital in more than one capital market and to diversify their investor base. With dual listings on the JSE, South African investors benefit from a wider choice of companies and, in some cases, have access to foreign company shares without using up oﬀshore holdings permitted by prudential limits. Additionally, investors can access liquidity on more than one trading platform as shares can be traded on a foreign market, then transferred between the relevant stock exchange registers.
According to data from independent analytics firm, ‘big xyt’, approximately 15% of the volume traded in Prosus occurs on the JSE, more than a third is traded in Amsterdam (the location of its primary listing) and the balance is traded across other trading venues. A South African investor looking to trade a large quantity of Prosus shares is therefore able to access far greater volume outside South Africa and transfer those shares to the local register for their locally-domiciled portfolios.
The ability to transfer shares across borders ensures that price discrepancies are quickly eliminated, with enduring premiums and discounts limited to the costs of cross-border transfers. Time-zone diﬀerences also allow South African investors to eﬀectively lengthen their trading day, given the later market closing times in Europe and elsewhere.
Market concentration reduces breadth of opportunity for some
As indicated above (right), the South African market is highly concentrated, with the top 10 shares accounting for over 40% of both the index weight and daily value traded. The next 30 shares account for approximately a further 40% of each measure. The remaining 100 or so shares account for as little as 17% of the index and value traded.
Due to this market concentration, the size of an asset manager’s firm-wide equity assets under management (equity AUM) radically aﬀects the available investible universe. This should be assessed by calculating the percentage ownership of a company’s shares in issue that would need to be held by a large manager to equate to a meaningful portfolio position.
For example, an asset management company that manages R60 billion in equity assets has 49 diﬀerent listed companies that could make up at least 5% of their equity portfolios, without owning more than 10% of any one of those companies. A manager with R300 billion in equity assets will find that the comparable investible universe (5% portfolio weight without exceeding 10% of company value) shrinks to just 15 shares. If the large manager opted to own up to 25% of any one company (which would radically limit their ability to change positioning), they would still only have 35 shares from which to choose.
As a medium-sized asset management company, Camissa Asset Management consequently has a significantly broader choice of shares listed on the JSE that can make up material positions in our client portfolios – compared to larger competitor managers. Given this lack of scalability in smaller companies for portfolio positioning by larger managers, their investment universe is meaningfully smaller.
Additionally, many very large managers – especially those in the global emerging market space – have liquidity restrictions that limit their investment universe to the most heavily traded companies.
These reduced universe considerations for the managers responsible for the bulk of assets invested in our market, can lead to less intensive research coverage of smaller shares with potentially more asset mispricings. This is amplified by the fact that smaller shares are also not profitable subjects for stockbroker (sell side) research.
Currently, we are finding significant excess expected return opportunities outside of the top 50 JSE-listed shares, as shown in the chart below. Our performance is therefore likely to deviate materially from larger managers who are mostly restricted to meaningful positions in the top 20 or so shares.