It is well documented that exchanges are struggling with the loss of primary equity listings and liquidity on their bourses while at the same time we have seen a significant increase in the number of Exchange Traded Funds (ETFs). Away from the debate around passive and active investing, the evolution in this space is creating interesting opportunities in the financial services sector across both the passive and active space.

While the South African securities market has been negatively impacted by nearly R1 trillion in outflows over the last eight years, we think that technology investments within the financial services ecosystem – including stockbroking - will be a key contributor to changing the landscape for the better.  

There are two major trends taking place that we think may positively influence the local financial services sector. As equity markets continue to evolve and these trends play out, businesses who invest in their technology capabilities should be well positioned to develop new products and services to benefit from these shifts, and in so doing, open up new opportunities for their clients.

The first trend that we expect could impact our local market is an increased focus on Asia and other Emerging Markets. While local investors have been able to go offshore for a while now, many South African investors have focused on the US, UK and parts of Europe. Recent research from Goldman Sachs  shows that the market capitalisation of Emerging Market (EM) economies will grow faster than their Developed Market peers with EM’s making up 35% of global equity market share in 2030 and 47% by 2050. While China and India are expected to lead this drive, this will open market participation to players across the globe – including investors from South Africa - who wish to access international markets. To support this, we saw in November 2023, the JSE announced it was exploring the opportunity for secondary listings on the JSE for Hong-Kong and Clearing Ltd (HKEX) and forms part of the broader JSE “Asia Strategy”. This aims to stimulate dual-listing structures and open investment opportunities in Asia to South African investors and vice-versa. 

In the South African context, this is an important development for investors. The under-performance of the JSE relative to US counterparts has had a material impact on the ability of local investors to grow their wealth. This outperformance by the US markets – specifically technology players – highlights the importance of being able to make both tactical and strategic asset allocations to future growth markets. By opening up the investment universe – both from a geographic perspective but also from a product perspective – investors have greater opportunities to grow their wealth. South African financial services firms in turn can innovate around the products and services they offer their clients. 

A second trend is the rise of passive and “active passive” investment products. In January 2024 it was announced that according to Morningstar data, passive investment products had globally surpassed the number of actively managed funds.  

While we acknowledge the role that passive investment products play in portfolio construction, the introduction of Actively Managed ETFs (AMETFs) in South Africa is an innovative new development. There has been a very positive response to the range of products which have listed over the last few months as they improve liquidity and options for investors from retail participants through to larger wealth managers. 

AMETFs allow fund managers to list their actively managed funds on exchanges and compete with ETFs in terms of the tradability of the underlying instrument or fund. In a world where liquidity seems to be drying up, these instruments may well improve liquidity on exchanges given the active nature of these ETFs as investors are able to move seamlessly between funds, on exchange, triggering the need for trading.

Consider for a moment that you have a traditional stockbroking portfolio that includes your blue chips such as Sasol and Naspers and you want to blend in traditional passive investments via an ETF but at the same time you want to incorporate an active element in the form of a Unit Trust. Through some of the new tools and products such AMETFs, investors are now able to do this. 

Wealth managers themselves can be Linked Income Service Provider (LISP) platform agnostic and access a combination of ETFs and Unit Trusts, easily navigating a complex landscape of regulatory compliance and multiple technology providers.    

To bring these types of products to market it requires technology investment, but it also requires exchanges and regulators to allow market participants the room to create additional financial products to the benefit of the end investor. Ideally, the industry wants to see greater deal-flow while removing red tape and administrative burdens that discourage product innovation. 

Importantly, these are not investments limited to simply supporting the JSE ecosystem but are extended to the likes of A2X who are playing a key role in improving liquidity and reducing costs in the South African market. We recognised this opportunity early on and were one of the first agency-only local brokers to make the investment in the necessary infrastructure to be able to seamlessly trade and settle across both exchanges.

Change and innovation in the financial services market is inevitable and with new products such as AMETFs coming to the fore, it is important to encourage continued investment in technology infrastructure to support investors and open the investment ecosystem to innovation. We look forward to partnering with clients and industry stakeholders to make this innovation possible.