Since 2022, the South African Reserve Bank has been warning, in increasingly plain language, that our public markets are in retreat. The word it has used is a variety of “shallowing”, “shallowness” or “shallower”. It’s a polite way of describing something that used to be deep and functional becoming dry, brittle and prone to breaking – like the curled, dried mud on the bottom of a Karoo pan in a high summer drought.
The problem is liquidity. Or, as with the brittle mud in the pan, the lack of it.
Foreign investors have been unwinding their exposure to South Africa for more than a decade. The local market is closing the doors behind them: companies delist quietly, IPOs don’t happen, primary capital raising is rare, and even our flagship stocks are starting to trade like small caps. In all but the largest companies, price discovery is breaking down.
The signals our market is supposed to send about value, risk and capital allocation are being replaced by policymaker indifference and an eerie silence.
But what is liquidity, really?
At its core, liquidity is the ability to transact in reasonable volume without moving the price too much. It’s what makes a market a market. Without liquidity, listed share prices are just a column in a spreadsheet. You can value your portfolio, but you can’t raise capital or exit a position without burning down the house.
Market participation
Liquidity doesn’t come from thin air. It comes from wide and diverse market participation. And that participation has four main sources:
Real-money direct investors: these are individuals allocating a portion of their own savings, driven by uncorrelated real-life events, often contrarian thinking and stickiness not found with professional traders. Recent academic research has shown this is not, in aggregate, “dumb money”. It might be a small part of total liquidity, but it is diverse, uncorrelated and critical for primary capital raising, the smaller end of the exchange and the market.
In South Africa, we neither define nor measure the extent of retail participation in secondary trade. But we know that retail participation is down – especially via traditional stockbrokers, with EasyEquities the exception – and we certainly know that market liquidity is drying up.
Passive and passive-adjacent flows: these are index trackers, “constructed” portfolios and most large South African “active” managers who are active only on the margin, with the vast weight of their funds hugging their chosen index benchmark. These funds manage their own liquidity using cash buffers and bank facilities and are so large that they can net off flows within their funds, further diminishing real-money liquidity on the market and, handily, avoid securities transfer tax (STT).
They rarely need to trade on-market, and when they do it’s almost always in the end-of-day auction. Their trade in shares outside the top 80 companies is a rounding error.
And if you think this description is uncharitable, consider that just 10 financial services groups manage 90% of South Africa’s savings. Concentration is a South African financial services fact – and concentration is inimical to liquidity.
Bizarrely, official National Treasury policy is to encourage further consolidation. Apparently, in the case of pension and provident funds, it’s been persuaded of the benefits of efficiency, cost savings and scale – but appears wilfully blind to the consequences for liquidity and overall market health.
Foreign investors: once dominant, and responsible for 40% of South African flows, they are often optimistically described as “watching from the sidelines”, whereas in fact they are off playing on other markets altogether.
High-frequency traders (HFTs): exempt from STT and co-located in the JSE’s data centre to gain latency advantage, these are providers of a specific kind of transactional, rather than real-money, liquidity. They are certainly not committed capital, and just as likely to vanish when the market moves against them.
There are also smaller funds, family offices, hedge funds, and trusts and charities – which form a long but very thin tail, managing the remaining 10% of funds not held by the major groups.
In South Africa, all four main sources of liquidity are under pressure – but only one has, for at least four decades, been deliberately weakened: the public. The direct retail investor. The one group that gives meaning to the term “public market” has been systematically patronised, priced out and excluded. In part, and almost uniquely in a developed financial market, this is because the financial services industry has been able to monopolise and gatekeep access to tax-advantaged savings vehicles.
Primary capital raising – the actual point of the entire system – barely involves retail anymore. IPOs, such as there are, are stitched up as private placings for institutions. Marketing roadshows are closed-door – just look at how the Boxer listing was marketed in private, with invite-only presentations. Accelerated book-builds offer no retail follow-on, unlike retail-friendly markets like Australia. Allocations are decided in secret. When retail is let in, it’s only after a concerted media campaign appealing against financial exclusion and for basic fairness – something you’d expect to be entirely unnecessary in the supposedly ESG-obsessed world we live in now.
What makes this exclusion worse is the tone. The local asset management industry speaks about retail investors with condescension and disbelief, as if it’s dangerous to let ordinary people near markets – unless, of course, it’s via a fund that charges 1.5% to loosely hug the top 40 index, with another 2% if it somehow outperforms. It’s financial feudalism: the capital may be yours, but the decisions and big chunk of the returns are not. And, we will make sure you are unfairly taxed if you do it yourself.
Compare that to Sweden, where retail investors are treated as legitimate participants. They have tax-advantaged stock broking savings accounts, easy-to-use platforms and IPO allocations that favour individuals. In Sweden, broad participation isn’t a platitude – it’s a structural feature. It’s no surprise that theirs is the most active IPO market in Europe. Their markets are liquid because they are public. Ours are dry because we keep the public out.
And when the market dries up, the feedback loop turns negative.
Listed in name only
A liquid market should offer a “liquidity premium” – a higher valuation for listed shares because they are freely traded. That premium is meant to reward companies for the costs and scrutiny of being public.
But in South Africa, that premium rarely exists outside the top 80 or so stocks. The JSE’s tail – the mid and small caps – trade at chronic discounts. They suffer illiquidity, wide spreads and negligible institutional interest. Some trade worse than their private peers. Being listed carries little valuation benefit.
So why remain listed at all?
If you’re not big enough to attract passive flows, not global enough for foreign money, and not connected enough for institutional attention, then you’re listed in name only. Your shares are tradable, yes – but not traded. And, make no mistake, it is not easy to delist.
And yet, when this whole system falters, the blame somehow falls on the companies. A senior fund manager recently claimed that “too few South African companies are liquid or large enough” for local balanced funds to invest in.
The inversion is staggering. Perhaps the problem isn’t that our companies are too small; just maybe, it is that our funds are too fat, too big, too concentrated, and their mandates too inflexible. Perhaps our financial services industry, with its often-sky-high fees and occasionally doubtful ethics, might be better at gatekeeping capital than allocating it?
Liquidity absolutely does not require big companies. It requires wide and diverse participation and active, direct engagement. We’ve starved of both. And now we’re shocked to find the pan dry, the mud brittle.
The Reserve Bank saw this coming, and the problem is not the JSE’s alone to solve. It belongs to the financial services industry, its regulators and its policymakers. But now, none of them are prepared to admit it – and it might already be too late for many of the smaller companies plotting their inevitable exit from the market.
Top image: Gallo Images/GO!/Simone Scholtz; Currency collage.
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