Firstly, we need to consider the growing relevance of markets including China and India. Today, the JSE has approximately 270 listed companies and a market capitalisation of about $1.5 trillion – a respectable value considering the size of the economy – but it pales in comparison to China which has 5000 listings across the Hong Kong and Shenzhen exchanges while the Bombay Stock Exchange has 5309 listings. There were more than 100 Initial Public Offerings (IPOs) in China in 2023 while India delivered over 200.

The Impact of Regulation: MiFID and MiFID II

The second is the regulatory environment in which we operate. Following the 2008 financial crisis, European regulators introduced the Markets in Financial Instruments Directive (MiFID), and this was updated in 2018 with MiFID II. This update expanded the regulations beyond equities to cover all types of securities and derivatives. 

Consequently, this had a significantly negative impact on the revenue that firms received for financial market research, making it unprofitable to produce research at the previous scale in Europe, while South Africa remained largely unaffected. Political decisions are inevitable in large organisations facing these challenges. This often results in necessary cost-cutting measures being implemented far from the regional hub, which is typically London, New York or Dubai, rather than where economic logic would suggest.

Declining Financial Market Research Coverage in South Africa

This has had a significant direct impact on the financial market research in South Africa. It is not only the quantity of analysts that has declined, but also the quality of their work, as coverage is spread wider. Financial market analysts are covering more stocks and sectors than ever before.

Additionally, the coverage of smaller stocks has particularly suffered. There are many listed companies for which Prescient Securities is now the only stockbroker providing research such as Metair and City Lodge. A decade ago, these companies would have had up to five analysts covering them.

Prescient Securities: Doubling Down on Research Coverage

There are many other interesting businesses across key sectors such as financials, packaging, food and consumer markets where the research coverage is very limited. Consequently, companies are now paying for research to be provided, on their terms. This results in research that lacks the independence that investors seek but need to accept, often unknowingly.

Prescient Securities has used this market change to double its research coverage in larger sectors such as Telecoms and Media as well as those that are not being looked at as a result of these market changes such as Hotels and Leisure.

Renewed Interest in Investing in South Africa

With the formation of the Government of National Unity (GNU) and some successes through initiatives including Operation Vulindlela – interest in South Africa is starting to pick up again. While it is coming off a low base, the JSE All Share Index has just completed its strongest third quarter in 11 years - near all-time highs.

South Africa’s Financial Ecosystem

It is important not to lose sight of the fact that we enjoy a world-class financial services sector. Our banking sector is well governed and well respected and the JSE is home to some good quality investment opportunities. Businesses like Shoprite, Naspers, Capitec and Bidvest have been sources of very real wealth, as well as smaller companies such as Afrimat, CMH, Bytes/Altron and Karooooo.

For this ecosystem to thrive, we need to create an enabling environment where entrepreneurs can realise the value they create in their businesses. If we get this right, we can once again become a destination of choice for investment capital which will in turn be a catalyst for further growth.  

 

About Prescient Securities
Prescient Securities is one of the few full-service independent stockbrokers who are also black-owned and controlled, a very important metric that ensures access to all the South African fund managers, a source of liquidity and ‘flow’ in its own right. It provides a full-service offering within the South African financial market, and execution services into global equity markets.
PSec was established in Cape Town in 1999 and serves the institutional, hedge fund, and pension fund markets. We take care to provide best execution and rated research across the South African asset classes and execution-only access to global equity markets. 

About the Author
James Twyman is an award-winning research analyst and the head of equity research at Prescient Securities. He specialises in the paper and industrial sectors and has been one of the top ranked analysts in his sector for over 25 years.
Through his 32-year tenure in the industry, James’ career started as an industrials and paper analyst at UBS in London for 17 years, he then moved to fund management as a global energy and mining analyst at Alliance Bernstein and Alliance Trust in London for seven years before joining Prescient Securities in 2017. 

Disclaimer
Prescient Securities (Pty) Ltd is an authorised Financial Services Provider – FSP 44074. This document is for information purposes only and does not constitute or form part of any offer to issue or sell or any solicitation of any offer to subscribe for or purchase any particular investments. Opinions expressed in this document may be changed without notice at any time after publication. We therefore disclaim any liability for any loss, liability, damage (whether direct or consequential) or expense of any nature whatsoever which may be suffered as a result of or which may be attributable directly or indirectly to the use of or reliance upon the information. For more information visit Prescient