Africas stock market rally, which resumed when global
risk appetite returned with a vengeance a year ago, has been
cut brutally short.
African equities, once the preferred asset class of many an
emerging markets investor, have underperformed relative to
mainstream emerging markets: the MSCI Frontier Markets index
have trailed the MSCI Emerging Markets index by 27% since March
The brakes were slammed on Africas stock rebound by
one key factor: an overwhelming bias among investors for liquid
stocks in other fast-growing emerging regions, despite
Africas relatively rapid growth recovery.
The IMF estimates that economic growth in Africa will reach
4.7% this year and 5.9% in 2011, compared with 2.1% last year
laudable given the severity of the global downturn. In
contrast, Latin America which saw a staggering equity
market rally before the Greek debt crisis ate into this
years gains is set to grow at 4.1%.
But investors say market technicals (the daily market
dynamics that shape investor preferences) rather than
fundamentals (stock valuations and the economic climate) are
likely to govern Africas equity prospects in the years
Pioneering investor Mark Mobius, executive chairman of
Templeton Asset Management, tells Emerging Markets:
African stocks now offer better value than other markets
in developing economies, so we will soon see more investors
increase their exposures.
Antoine von Agtmael, chairman of Emerging Markets
Management, which oversees up to $14 billion of stocks
globally, warns: Many mainstream investors would like to
up their exposures to African stocks, but you need experience
on how to deal with the [volatile] daily market
conditions and illiquid environments.
Therein lies the rub. African markets typically offer
stronger returns, but mainstream investors who count
their returns in risk-adjusted terms rather than headline gains
favour more developed emerging markets that offer less
risk. For example, stocks included in the MSCI Frontier Market
index traded at one and a half times book value, paid a solid
dividend yielding 4.2% and earned a respectable return on
equity of 10.4%, according to State Street Research and
yet underperformed the MSCI Emerging Markets index.
According to the IMF, Africas inability to attract
equity capital is not down to unattractive valuations or poor
growth that eats into return on equity but the poor
liquidity. The small size [of bourses] and lack of
liquidity deters foreign investors: the exposure of foreign
institutional investors is typically negligible until a market
reaches about $50 billion in size or $10 billion in shares
traded annually, said the IMF in its annual World
Economic Outlook for the African region, published in
On this basis, just Nigeria and South Africa which
ranks in the world top 20 in terms of market capitalization
fit the benchmark. Elsewhere, market liquidity is less
than 10% of the value of shares actually traded each year.
Such low business volumes make it difficult to support a
local market with its own trading system, market analysis, and
brokers, the IMF notes.
The number of stock markets in sub-Saharan African countries
has risen from five in 1989 to only 16 today. Although stock
markets on the African Stock Exchanges Association (ASEA), led
by commodity-rich, heavyweight Nigeria, are surprisingly
well-regulated, its the sheer lack of equity capital
invested in the first place that weights on the outlook. The
lack of foreign penetration into these markets has triggered a
reliance on domestic institutional investors, such as pension
and insurance funds, whose buy-and-hold portfolio strategy has
strangled secondary market liquidity.
As a result, urgent measures are needed to tie up illiquid
bourses either through linking exchanges, or through dual
listings. Talks are taking place between African securities
regulators and policy-makers on this issue, but progress has
One solution is to create regional stock exchanges. In
mid-April leaders of the Nairobi, Uganda and Tanzania and
Rwanda capital markets held their 16th meeting under the East
African Securities Exchanges Association. The talks were under
the purview of the political and economic project to create a
common market, known as the East African Community.
At present, consultations are underway to deepen equity
market liquidity and efficiency but its not clear
if and when full trading links between the bourses in the
region will be established. Instead, securities regulators are
concentrating on dematerialization the conversion of
share certificates into electronic securities in trading
platforms and greater harmonization.
Elsewhere in the continent, progress has been even slower.
Discussions over creating a central African stock market have
stalled since 1998. Meanwhile, its not clear if putative
cooperation between West African exchanges, principally
Nigeria, Ghana and potential new exchanges such as Sierra
Leone, established at a December 2009 African Stock Exchanges
Association summit, will materialize.
In theory, southern Africa is fertile territory for
strengthening equity trading links due to the similar
regulatory and business environment. The Committee of SADC
(South Africa Development Committee) Stock Exchanges has
endorsed a plan to create a so-called hub-and-spoke technology
model to link the exchanges. This involves the channelling of
orders into exchanges through nationally regulated stockbrokers
and sending clearing and settlement information using the
widely-used FIX financial information computer protocol.
Sunil Benimadhu, chief executive of the Stock Exchange of
Mauritius, says the project could move soon with funding in the
offing. Lots of work on how to link different markets has
been done from a technical standpoint. Now we need to raise the
financing, he says. He says the most important point is
to keep national exchanges as they stand and enable their
members to reach the members of different exchanges.
But competition between bourses and fears that dual listing
could further constrain already weak liquidity has put the
brakes on deeper integration. In 2009 the JSE created the
Africa Board, which aims to dual-list some of the
continents biggest and best companies and create more
liquidity using JSE trading and other systems. But the take-up
has been slow. The first listing was Namibias Trustco in
February 2009. The second was this April, with the arrival of
Wilderness Safaris, a southern African ecotourism company,
which listed first in Botswana.
Geoff Musekiwa, a business development manager at the JSE,
shoots down concerns that such moves fragment liquidity.
The key objective of the JSE Africa Board was to assist
in the development of the other exchanges on the continent. We
have looked empirically at the benefits of dual listings,
particularly regarding liquidity in the home exchange in the
long term, he says.
The JSE says its own experience of leading companies listing
in London and other international markets suggested that, when
it comes to trading across different markets, the more the
But for now, African companies prefer to list abroad.
Offshore listings make it easier to attract international
investors to African business opportunities as well as
developed market risk but at the cost of reducing market
capitalization in local bourses and thereby deterring foreign
investment onshore. According to a MediCapital analysis of 32
actively managed African investment funds established since
2007, one-third of their allocation is devoted to Egypt and
Nigeria as well as South African firms listed in the
rest of Africa. The remaining two-thirds are African stocks
listed in London and North America.
Many companies with the majority of their interests in
Africa list offshore through American Depositary Receipts
(ADRs). Others keep their primary listing abroad, such as
African Barrick Gold, which mines in Tanzania, which listed in
March on the London Stock Exchange and plans a possible listing
in Dar es Salaam.
For battle-hungry investors who can stomach the illiquidity,
just getting a bid/offer quote on a publicly listed stock used
to be torturous. Now there are signs, however tentative, that
prospects are improving. International brokers such as Auerbach
Grayson, Exotix, Securities Africa and Renaissance Capital are
offering a single sales front to international investors,
particularly institutions. Either they have their own local
stockbrokers, or they link to local exchange members and share
commissions. Some local brokers, including Imara Holdings, a
pan-African financial services firm, are expanding into their
products and services.
For those who can navigate the daily storm, the
regions economic credentials offer compelling
opportunities. As a result, fund managers seeking out new
themes in an increasingly crowded emerging market space can
cast Africas infant equity market development as
indicative of its potential.
Standard Banks head of African equities, Matthew
Pearson, says last year African markets had a mixed year and
mostly underperformed their benchmark peers. For 2010 we
believe that markets in sub-Saharan Africa (excluding South
Africa) will provide some of the best global equity market
performances, most notably Nigeria and Ghana. And in
recent months, investors have woken up to the potential.
For example, Nigerian Stock Exchange All Share index has
surged 27% this year, outperforming a 9.5% gain in the Morgan
Stanley Frontier Markets index over the same period. Mobius
cites abundant natural resources, a young population, and
heightened interest from rich emerging market countries
together with banking reforms as triggers for the rally.
For the same reasons, he says, a sustained structural bull
market for equities across the continent is a
Investors hottest picks include those linked to
population growth each year there are more babies in
Nigeria than across the European Union, says Dexter Mahachi of
stockbroker Securities Africa. Growing populations and climbing
GDP per capita feed through into soaring demand for consumer
goods, telecommunications and financial services, among other
We have made a huge amount of money in Africa
with surprisingly little volatility this is achievable
if you have a long-term horizon, says Agtmael. This vote
of confidence from Agtmael whose term emerging
markets penetrated the investor psyche and gave birth to
a flourishing asset class bodes well for African stocks
in the long term.
For now, regulators must concentrate on the decidedly unsexy
legal and accounting frameworks and shoring up the
equity-trading infrastructure to court new capital. Yet, while
necessary, even this is probably not enough to turbo-charge
foreign equity capital investment: the ultimate driver of
demand for Africa stocks will lie in democratic reforms and
better governance of the broader economy.