Demise of our stock markets will not be happening so soon. PHOTO | POOL
Some disturbing analysis in the latest Africa Capital Markets Watch report by PwC.
I'll only highlight two key observations and add some commentary.
The sub-Saharan market, specifically South Africa, reported a reduction of approximately 73 per cent in equity capital raised when compared to 2020.
This is a trend that has been seen over the past five years, in which the number of de-listings outweigh the number of listings on the Johannesburg Stock Exchange.
The same trend is being experienced throughout the rest of sub-Saharan Africa. Investor relations experts speculate the reasons for the exodus to be low valuations and high cost related to corporate actions.
This wave of delistings is not unique to Africa.
The same is happening at the global level. According to the World Bank, the number of listed companies worldwide peaked at 45,743 in 2014 but slipped to 43,248 by 2019.
Does this decline merely mirror the evolving nature of the global economy, or is it a sign of something more concerning?
I wonder where that leaves the recently launched Africa Exchange Link Project (AELP).
I believe this is a secular trend that may last a couple of years (if not decades) but I am not at all convinced that this signifies the death of markets.
READ: SMEs to access capital through stock market
I recall sales in the global music industry peaked in 1999 at $24 billion and 16 years in, sales had almost halved.
It’s only after new innovations such as streaming, digital downloads etc, were introduced that the trend turned and as of last year, sales had surpassed the pre-1999 level.
My point; delistings may be necessary for the old to give in to the new.
Plenty has been written about the old hindrances; tedious compliance audits, burdensome disclosure rules, fixation on short-term performance, excessive red tape, etc.
Perhaps, it is time for the industry to self-reflect on these, reinvent and hopefully rise again.
While global capital market activity continued to see an uptick with the highest initial public offers (IPO) proceeds ever recorded in 2021, African equity capital markets (ECM) activity continued on a downward trend.
The year 2021 saw the lowest ECM activity in the last five years with a decline in value and volume by 28 per cent and 23 per cent, respectively, compared to 2020.”
The above is a great pointer that capital markets have changed while public markets have not.
Liquidity gaps, tedious listing procedures and poor regulatory frameworks remain huge issues.
READ: Where are financial markets headed?
Additionally, the pullback of IPOs could be a result of the lacklustre performance of stocks that have gone public before - the Renaissance IPO Index has averaged (0.5 per cent) in the past five years ending 2021.
In my view though, the main factor behind the decline is the emergence of the private equity market. These funds are awash with dry powder - cash that's been committed by investors but not yet “called” by private equity investment managers for onward allocation to a specific investment - take up equity stakes and invest in private debt.
According to Pitchbook, dry powder sits at around 1.2 trillion dollars as of Q3 2022.
The writer is the managing director of Canaan Capital
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