The JSE: An Excellent Market That Keeps Getting Smaller

A market can be excellent and still be losing the companies that make it matter. This story covers the exchange’s history, the London exodus, the delisting trend, the concentration problem, the pension fund rules and what the JSE actually offers now — part of the South Africa Company Stories hub.

How did the JSE begin?

To finance the Witwatersrand. Founded in 1887, a year after the gold discovery, the exchange existed to channel capital into deep-level mining, and mining houses dominated it for the following century.

The pattern set then persisted: a market organized around resource extraction, controlled by a small number of groups, funded partly by foreign capital and heavily influenced by commodity cycles.

Sanctions and exchange controls later turned it inward. Isolated from global markets, the JSE became a closed system where domestic savings had nowhere else to go, which supported valuations and entrenched the conglomerate structures described in the Anglo American story.

What happened when controls eased?

The largest companies left. Between 1997 and 2000, Anglo American, Billiton, SABMiller, Old Mutual and Dimension Data moved primary listings to London, seeking access to global capital, index inclusion and acquisition currency.

The immediate effect on the JSE was ambiguous: several retained secondary listings and remained in local indices, so measured market capitalization did not collapse. The longer-term effect was decisive, because corporate headquarters, decision-making and subsequent growth located elsewhere.

The episode is examined fully in the London listings story, and it remains the most consequential structural change in South African capital markets.

Why have delistings outpaced listings?

Because being listed became less attractive than being private. Compliance costs, disclosure requirements, activist pressure and, above all, persistently low valuations made the public market a poor deal for many mid-sized South African companies.

Private equity and management buyouts took advantage. When a company trades at a substantial discount to what a private buyer will pay, taking it private is straightforwardly value-accretive, and dozens of JSE companies followed that logic.

New listings failed to compensate. Weak economic growth produced few large scaling companies, and those that did emerge frequently listed abroad or were acquired before reaching listing scale — a dynamic that affects the startup ecosystem examined in the TymeBank story.

How concentrated is the market?

Extremely, and in a specific way: the largest constituents by weighting derive most of their earnings outside South Africa. Naspers and Prosus, resources companies, Richemont and globally focused industrials dominate index weight.

This creates an unusual situation in which the local index is a poor proxy for the local economy. The JSE can rise while South African growth is weak, because its largest components respond to Chinese technology valuations, commodity prices or European luxury demand.

For investors seeking South African exposure, the practical implication is that broad index investment provides little of it, and genuine domestic exposure requires deliberate selection of the smaller, domestically focused companies where liquidity is thinner.

What role do pension funds play?

A decisive one, governed by Regulation 28, which limits how much retirement funds may invest offshore. Raising that limit to forty-five percent gave South African savers greater diversification and simultaneously removed a captive source of demand for domestic assets.

The policy trade-off is genuine. Forcing domestic savings into a small economy concentrates household retirement risk in the same country where those households earn their income and own their homes, which is poor diversification.

The consequence is that local equities and bonds must now compete for domestic savings on merit rather than by regulation, which is economically correct and has contributed to weaker demand for JSE listings.

What is the JSE actually good at?

Regulation, infrastructure and market depth in what remains. The exchange consistently ranks highly in global assessments of regulation of securities exchanges, settlement is efficient, and derivative, bond, commodity and interest rate markets are well developed.

It also operates as the gateway for African capital raising more broadly, listing companies from across the continent and offering the deepest pool of liquidity available in African time zones.

The exchange itself is a listed company with a diversified revenue base spanning trading, clearing, information services and listing fees, which makes it less dependent on new listings than its public profile suggests.

What would reverse the decline?

Economic growth, principally. Exchanges reflect the economies they serve, and a market whose underlying economy has grown slowly for over a decade will not generate the pipeline of scaling companies that listings require.

Structural measures help at the margin: simplified listing requirements for smaller companies, dual-class share structures for founder-led businesses, and reduced compliance burdens have all been introduced or debated.

The deeper issue is the valuation gap. As long as South African companies trade at persistent discounts to international peers, the incentive to list abroad or go private remains, and no exchange rule change alters that calculus.

What is the lesson?

That financial market quality and financial market size are different things. The JSE is well regulated, technically excellent and internationally respected, and it is shrinking — because those attributes do not create issuers.

The second lesson concerns the cost of a small home market. Companies that scale internationally eventually find their shareholders, analysts, comparables and acquisition currency elsewhere, and the listing follows.

The third is about measurement. An index dominated by companies earning offshore is not a measure of national economic performance, and treating it as one produces persistent misreading of both the market and the economy.

Why do South African companies trade at a discount?

Because investors require a higher return to hold assets exposed to currency volatility, electricity and logistics constraints, policy uncertainty and slow growth. The discount is not a judgement about individual company quality but about the environment they operate in.

It compounds itself. A persistent discount makes equity expensive as a funding source, encourages listings elsewhere and take-private transactions, and reduces the pool of comparable listed companies — which further thins the market and widens the discount.

Breaking that cycle requires either sustained improvement in the underlying conditions or a structural change in who owns South African equities, and neither has occurred at the scale needed.

What is the derivatives and bond market like?

Sophisticated and deep relative to the economy’s size. South Africa has well-developed interest rate, currency and equity derivative markets, an active government bond market with substantial foreign participation, and a rand that is among the most traded emerging market currencies.

That depth is a genuine asset. It allows corporates and investors to hedge, supports price discovery and makes the country accessible to international investors who need liquidity to enter and exit positions.

It also transmits global sentiment quickly. Because the rand and local bonds are liquid proxies for emerging market risk, South African assets move on global risk appetite in ways that have little to do with domestic developments.

What happens to a market that keeps shrinking?

It becomes a smaller, more concentrated venue serving fewer issuers, with index products dominated by a handful of names and reduced coverage of mid-sized companies. Liquidity concentrates in the largest constituents and thins elsewhere.

The exchange itself can remain profitable, since its revenue comes substantially from trading, clearing and data rather than from listing fees, and consolidation of activity into fewer names does not reduce turnover proportionally.

The economic cost falls on companies that would have listed and cannot, and on savers whose domestic investment universe narrows. That cost is diffuse and therefore politically weak, which is why the trend has continued for two decades without decisive intervention.

What is the JSE’s role in African capital markets?

The deepest pool of liquidity on the continent and the venue where African companies seeking meaningful institutional capital most often list. It hosts secondary listings from other African markets and provides the infrastructure that smaller exchanges lack.

The limitation is that this role has not translated into a large pipeline of African issuers. Companies that reach genuine scale frequently target London or New York directly, and regional exchanges have developed their own domestic listings, leaving the JSE dominant but not growing through African expansion.

What would make listing attractive again?

Higher valuations, lower compliance burden and a genuine pipeline of scaling companies. The first depends on the economy and on investor confidence, the second on regulation, and the third on entrepreneurial activity and growth capital.

Reforms have addressed the second: simplified requirements for smaller issuers, acceptance of dual-class structures and reduced duplication in disclosure. These help companies that already want to list and do not change the calculus for those choosing between Johannesburg and abroad.

How does foreign ownership of local assets work?

Substantially and volatilely. Foreign investors hold large proportions of South African government bonds and significant equity positions, and their flows drive market direction far more than domestic institutional activity does.

This makes local asset prices sensitive to global conditions — interest rate expectations, emerging market sentiment, currency moves — that have nothing to do with South African fundamentals, and it means periods of global risk aversion produce outflows regardless of domestic performance.

What is the exchange’s own business model?

Diversified across trading fees, clearing and settlement, market data, listing fees and post-trade services, which makes it far less dependent on new listings than public commentary about delistings implies.

Trading revenue tracks volumes rather than the number of listed companies, and volumes have held up because activity concentrates into the largest names. Information services and technology licensing have grown as additional revenue lines.

This is why the exchange can report solid results while the listed universe shrinks — a divergence that matters, because it means the institution with the most direct interest in reversing the decline is not the one most damaged by it.

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