Mammoth exchanges threaten JSE ‘minisaur’

The proposed merger of the London Stock Exchange (LSE) and Deutsche Börse raises interesting questions about the future of smaller exchanges, such as the JSE, which may increasingly struggle to attract large listings when rival exchanges boast better liquidity and access to capital.

The proposed “all-share merger of equals” was announced in March. The plan is to establish a new UK holding company, owned more or less equally by the shareholders of the two exchange groups.

The rationale for the merger is, essentially, to create a bigger, better and more liquid market that can offer more diverse products to its many different customers. The combined entity will have deeper pockets with which to manage regulatory and technological change, which is placing pressure on the revenues of stock exchanges globally.

For example, the advent of blockchain technology, which enables entities and individuals to transact and trade assets, including shares, directly with each other without an intermediary could spell trouble for exchanges and clearing houses.

There have been 18 stock exchange mergers between 1999 and 2014, according to a paper in the Journal of Accounting and Finance. The authors cite economies of scale, increased revenue or market share, cost reduction and geographic diversification as some of the reasons for the mergers.

Professor at UK-based Warwick Business School (WBS), John Colley suspects that the concentration in stock markets is a continuing trend. “In effect the smaller, national-based stock markets will struggle as big companies look for listings on the major markets,” he tells Moneyweb.

As continent-based exchanges begin to dominate (think the Intercontinental Exchange and Nasdaq), competition within territories will reduce, Colley, a former executive MD of Saint-Gobain, says.

“For example, where does [the LSE/DB merger] leave the Paris Bourse in Europe? Apart from French companies who will list on it? A European based company will have little choice but to list on the LSE/Deutsche Börse tie up.”

He cautions, however, that the merger may still fail to win the approval of competition authorities.

Ben Kooyman, a junior analyst at Denker Capital, notes that the merged entity will be able to compete on a more equal footing with US equity markets, but argues that the tie-up is unlikely to affect the JSE materially, since the LSE is already much bigger than the local bourse.

“I can’t see [the merger] attracting any further companies that hadn’t already listed on the LSE just because it’s a bit bigger, so I would expect the impact to be minimal,” he notes.

Kokkie Kooyman, portfolio manager at Denker Capital, remarks that exchanges will increasingly merge due to revenue pressures driven by, for example, technology and the need to control costs. “The JSE will face the same pressures over time,” he says.

David Shapiro, deputy chairman of Sasfin Securities, points out that the companies dominating the JSE are not truly South African companies anyway. “Excluding ABInBev, more than 40% of the market is in four stocks,” he notes, naming Naspers, SABMiller, British American Tobacco (BAT) and Richemont.

“If we took the largest ten companies away there would be no JSE,” he quips.

“In a world without exchange control, if you could put your money anywhere you want, why would you need the JSE unless you wanted to invest in a small cap?”

Most local wealth managers can invest money on any stock exchange in the world via global investment banks, he says.

As companies internationalise, stock exchanges will increasingly do the same, with dual listings an early indication of this, Shapiro adds.

The secondary listing of ABInBev on the local bourse was done largely because it was administratively more feasible and to win the support of regulators, he argues.

Best in class

Having said that, the JSE is consistently ranked as one of the best-regulated stock exchanges in the world and remains a highly liquid market. South Africa held the top spot in the ‘regulation of securities exchanges’ ranking for two years running before being bumped into second place by Finland in the 2015/2016 World Economic Forum’s Global Competitiveness Index.

South Africa ranks number one in the world for financing through the local equity market, which assesses to what extent companies can raise money by issuing shares and bonds in the capital market.

The JSE continues to see high numbers of new, albeit small, listings and remains an anchor market in Africa. “The technology, data, clearing and settlements are all of a very high standard,” comments Warren Jervis, Old Mutual Investment Group (OMIG) small-cap fund manager.

“The regulator largely determines the competitive position of the exchange and there is always the risk that other exchanges are granted a licence to operate in South Africa. However, for now it remains the premier exchange on the African continent,” he remarks.

“It’s less likely that it will be disintermediated by other exchanges and more likely that, due to the high quality of the operation, it will be acquired.”

The JSE has a market capitalisation of R11.3 trillion, behind London’s FTSE 100 at R38.9 trillion and the New York Stock Exchange (NYSE) at R361.2 trillion.

The JSE was not available to comment.

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