Stock markets have traditionally been the place where investors, retail and institutional, have had access to the most successful asset class for inflation-beating growth: listed shares, or equities. But stock markets globally are facing a crisis. Fewer new companies are listing on them and existing companies are leaving them, resulting in a shrinkage of listed equities available for investment.
In a report for London-based asset manager Schroders, Duncan Lamont, the firm’s head of strategic research, notes that the number of companies listed on the London Stock Exchange is down 60% since 1996, from 2 700 companies to 1 100. The US stock market has shrunk by 40% since 1996, and there have been similar drops in Germany (down 40% since 2007) and other bourses.
Lamont says that in the US, over 300 companies a year, on average, joined the stock market between 1980 and 1999. Since then, there have been only 129 a year.
South Africa’s JSE has fared even worse, shrinking by 50% in the last 20 years, from about 600 companies in the early 2000s to about 300 today, according to Kelin Pottier, product development manager at 10X Investments, in a recent blog titled “Honey, I shrunk the JSE”.
What’s behind the trend?
A number of factors may explain shrinking stock markets worldwide, and there are further factors specific to the JSE.
Lamont says that the positive reasons for companies to list on a stock exchange are gradually being outweighed by reasons not to.
Counting in favour of listing, the most obvious reason is access to capital, but there is also a raised public profile; greater liquidity for investors; greater transparency for investors on governance and accounting; and the ability to use public shares as currency in mergers and acquisitions.
Factors against listing include increased funding coming from private equity and venture capital sources; increased regulation around listing requirements, reporting and governance; higher costs; unwanted transparency and a loss of control for owners.
In addition to these, Pottier says the JSE faces low company formation amidst weak economic growth. He also says that, in this depressed environment, foreign investors have taken advantage of low share valuations and the weak exchange rate to acquire local companies and then delist them.
“We've also seen companies delisting because they want access to deeper pools of capital which aren't available in South Africa. Alternatively, they are looking to unlock value for investors by listing elsewhere. A prime example is AngloGold Ashanti seeking to move its primary listing to the New York Stock Exchange,” Pottier says.
He notes that where you have capital to invest locally but not enough options to invest in, you get a supply-demand mismatch. “As economics dictates, if you have too much money chasing too few goods or too few investments, the price goes up. As an investor, paying a higher price means you're going to be earning less return for the risk you are taking.”
Where can investors go?
The stock market is the main place for savers to put their money for long-term growth. This may have to change because, Lamont says, because, as new companies stay private for longer, stock market investors are missing out on an increasingly large part of the global economy. “Many of these companies are in high-growth, disruptive industries. If high-quality companies find little reason to go public, the risk is that over time the quality of the public markets deteriorates. Should this occur, returns from public equity markets in aggregate could move structurally lower relative to private markets,” he says.
The answer may be to explore the private equity market, but this market, which is less regulated, has traditionally been out of reach of the retail investor. Entry-level investment barriers higher and there are regulatory limits on how much collective investment schemes and retirement funds can invest in private equity.
Pottier says that, in the meantime, you can diversify across asset classes and geographies. “The first, most obvious, option an investor could consider is government bonds, which are paying really high rates of return for the amount of risk you're taking. We think it's important, now more than ever, for investors to diversify globally and take advantage of higher quality, more abundant opportunities, where you are being compensated for risk and don't have this supply-demand mismatch,” he says.
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