Unity is the key
The number of stock exchanges in Africa has more than doubled over the past decade, but most remain too small to be competitive. In this review of African bourses, Moin Siddiqi says regional integration of markets must be speeded up if they are to be internationally viable.
Free markets are rapidly spreading across the continent of Africa. Most countries have implemented big structural changes, including greater openness to foreign investment, reducing red tape and a progressive relaxation of exchange controls.
Today the continent boasts 19 bourses, including the giant Johannesburg Stock Exchange (JSE) and three thriving exchanges in North Africa. In 1989, there were only seven exchanges. The most recent to enter the ranks is the Bolsa de Valores de Mozambique in Maputo. The number may rise to 25 by 2002-04, as countries like Madagascar and Angola are planning to open bourses to trade shares in privatised companies.
In the sub-Saharan region, excluding the JSE, markets of meaningful sizes are Nigeria, Zimbabwe, Cote d’Ivoire, Kenya, Mauritius, Ghana and Botswana.
The JSE accounts for almost 90% of the total market capitalisation of sub-Saharan Africa and 75% of the entire continent. It is the most technologically sophisticated bourse in the emerging markets. Electronic trade settlement systems have boosted liquidity and turnover. Presently, the settlement period is T+3.
In North Africa, Egypt remains a market leader. In an upbeat report, HSBC Securities stated: “Egypt is the market that stands out for us. A changing external position, strong domestic growth, and a defensive and exceptionally cheap market will prove a winning combination that will ensure out-performance relative to other emerging markets.”
The market’s modernisation is gathering pace this year with the installation of a fully automated and integrated trading, clearing and settlement system (ATS). This will increase the exchange’s capacity, enabling it to handle 100,000 trades daily. Within the next two years the privatisation of Egypt Telecom and other utilities, plus the flotation of government’s stakes in several banks and insurance companies could triple the market’s capitalisation, attracting considerable foreign portfolio investment.
While most of Africa’s exchanges are still undeveloped, infrastructure is being improved and capacity is being broadened with assistance from the International Finance Corporation (IFC) and various overseas agencies such as the European Union Know-How Fund and the Swedish development agency, SIDA.
The Kenya Capital Markets Authority plans to install a central depository system which will cut the Nairobi SE’s transaction period from seven to three days and a new electronic trading system. The Accra SE will also be installing a modest automated centralised clearing system this year. In Nigeria, a central securities clearing system, installed in 1997, has cut delivery and settlement to T+5. A new automated trading system, introduced in 1999 has improved the transparency of Lagos SE trades.
The Bourse Regionale des Valeurs Mobilieres (BRVM) of Francophone West Africa - the world’s first regional bourse - uses a modern electronic trading and clearing system. But trading on the Harare SE is still paper-based and operates on a rolling T+7 basis. Settlement periods for fledgling markets in Malawi and Zambia are even longer.
Not on global investor radar
African markets, excluding South Africa and Egypt, are still off the radar of global investors because of limited accessibility and their exclusion from main indices, such as the Morgan Stanley Capital International (MSCI) emerging markets index, or the Standards & Poor’s/IFC global composite index.
During the first half of 2000, most bourses, except those of Tunisia, Nigeria and Egypt have performed poorly. The figures from HSBC show that in US dollar terms, the JSE fell by 27%, BRVM by 19.7%, Zimbabwe by 17.5%, Ghana by 16.5% and Kenya by 13.5%.
The decline in the JSE is mainly due to a sharp rand depreciation and investors’ concerns over effects of the Zimbabwean political-economic instability. By contrast, the Lagos SE rose by 14%, underpinned by a reviving business confidence thanks to higher world oil prices and signs of a more active privatisation drive under President Olusegun Obasanjo.
But African countries remains a poor relation of their peers in southeast Asia, South America and central and eastern Europe. Market capitalisation for sub-Saharan Africa, excluding the JSE, totals about $14bn. This in fact, represents the entire capitalisation of the Czech Republic’s bourse.
The fledgling markets are struggling to spread their wings and make useful contributions to their respective economies, as well as attract foreign portfolio investment.
Benefits of stock
markets:
For developing nations, stock exchanges are an important focal point to project a country’s potential to the international investment community. Thriving capital markets are beneficial for emerging Africa in various ways.
Access to international finance opens up channels for foreign portfolio investment, which in 1999 totalled $2.42bn, modest by global standards but still substantial compared with almost zero in 1991. Portfolio flows are essential for progressive development of capital markets and in the medium to long term can attract inward foreign direct investment that boosts economic growth and managerial and technological transfers.
Raising the corporate profiles of genuinely African companies overseas are indigenous blue chip companies such as Ashanti Goldfields, Delta Corp. (a Zimbabwean industrial and commercial conglomerate controlled by SA Breweries), West African Portland Cement (Nigeria), Meikles Africa (Zimbabwean conglomerate), Sonatel (the Senegalese telecom group), Kenya Airways, Ecobank, and Union Bank of Nigeria.
Mobilising domestic savings through the marketing of equity mutual funds would help in the repatriation of a sizeable slice of African flight capital and diversify sources of commercial funding.
Most local banks are too weak to participate in medium to long term corporate financing. Thus stock markets are important channels to raise risk capital for new investment through rights issues and initial public offerings (IPOs).
Healthy markets can help to facilitate governments privatisation programmes and stimulate private industry. Selling off parastatals and utilities can boost capitalisation, add depth to local capital markets and encourage more institutional investment.
Stock markets also serve an educational role by fostering an ‘equity culture’ and promoting the benefits of economic liberalisation and private investment to the wider public which still remains wary about market reforms. In Ghana, newspapers regularly publish columns on the merits of investing in equities.
Opportunities
and risks
Despite some structural problems that are only too visible, Africa, a continent rich in minerals and energy, offers excellent business opportunities.
Chosen selectively, quality stocks are usually available at hefty discounts. According to G. Boon of Investec Asset Management, “There’s a lot of value left in the region.”
Prime listed stocks, some of which are subsidiaries of multi-nationals like Barclays Bank and Standard Chartered, Unilever, Brooke Bond, Lever Brothers and Nestle are profitable, pay annual dividends and possess strong cash flows.
For dedicated investors, such as the Morgan Stanley Dean Witter Africa Investment Fund, the Africa Emerging Markets Fund (which invests in countries implementing privatisations), Framlington West Africa Growth Fund and the recently launched Orbis Africa Equity (Rand Fund), the region offers good bargains.
One investor said: “If you are willing to take the risk, there are some very good returns in these markets.”
Africa is by far the cheapest emerging market region, with most of the markets trading at about 8 to 10 times prospective earnings. This compares with mostly overvalued markets in South America, where price-earnings ratios average 3:1.
These markets offer fund managers safe outlets for diversifying investment risks because of low ‘correlation coefficients’ with other emerging markets. Thus a weak integration of Africa into the global economy, in effect, cushions fledgling markets from external fluctuations or shocks like the East Asian meltdown in 1997, or the Russian crisis in 1998.
A combination of improving macroeconomic conditions and corporate restructuring, as in the case of Ashanti Goldfields, should improve the quality of earnings, allowing for higher valuations in coming years.
Not for the novice
However, investing in Africa is not advisable for the unsophisticated investor, those aiming for quick profits or are those unable to absorb short-term losses.
Investor appetite for the continent is not helped by media emphasising the conflicts in Angola, Democratic Republic of Congo, Sierra Leone, or the war betweenEritrea and Ethiopia. As HSBC Securities comments: “The political events in Zimbabwe and several other African countries have done nothing to enhance investor sentiment. Clients now feel it is a risk they can do without.”
Regrettably, regional political-economic instability is now undermining the investment profiles of stable countries, like South Africa, Botswana, Nigeria, Ghana, Senegal, and Kenya.
The main deterrents to thriving markets are low levels of listings, liquidity and turnover. Most markets are in a catch-22 situation. One analyst noted: “With so few listings and such low turnover, they can have a hard time attracting foreign institutional investment. Yet, without higher levels of foreign interest, they also cannot convince local private companies to list.
After a decade of operation, Ghana has managed to list 23 companies, Botswana 15 and Swaziland only six. Activity tends to be dominated by a single stock or very few stocks. For example, Ashanti Goldfields represents around two-thirds of the total capitalisation of Ghana’s SE while Barclays Bank and Sonatel account for 39% each of Botswana’s SE and the BRVM respectively.
Poor liquidity may mean that investors cannot sell their stock. Analysts cautioned that “You can get into the market but it is not always easy to get out, so investors have to be really committed to staying in a particular investment for some time.” These fledgling markets are extremely illiquid and total turnover remains negligible. In 1999, Ghana SE reported a mere 2% turnover.
Institutional investors such as life assurance companies and a few foreign African funds tend to sit on their shares, especially in the case of blue chips which offer real potential for long-term capital growth. At times, too much money is chasing too few shares.
Goal of regional integration
There are other pitfalls undermining investors’ interest and confidence. Among these are higher stamp duties and transaction charges, poor accounting and auditing standards, lack of brokerage research (except in SA and Egypt), inadequate regulations covering insider dealing and corruption, a lack of transparency and custodial services, and a risk of devaluation eroding returns in hard currency.
Furthermore, some stocks are over-reliant on agriculture, highly vulnerable to both adverse weather and the volatility of prices in soft commodities.
The high yields on risk-free government bonds and treasury bills deter investment in the stock markets. T-bills rates exceed 60% in Zimbabwe and are 26% in Ghana. The World Bank says: “The combination of loose fiscal and tight monetary policies often come at a great cost to the equity market.”
Fledgling bourses like Malawi’s or Zambia’s are too small to appeal to large institutional investors. Most markets lack the size to mobilise and allocate capital effectively.
The regional exchanges can function better if they can achieve consolidation and mergers, such as Francophone West Africa’s in September 1998. Companies then would have an easier and cheaper access to capital. Jimnah Mbaru, chairman of both the African Stock Exchange Association (ASEA) and Nairobi SE, says: “African markets should integrate if they are to become efficient sources of investment capital.”
Only a larger integrated market will ensure adequate liquidity and market diversity to compete with the more established markets of Asia and Latin America.
The ASEA is encouraging its members to proceed with regional integration that facilitates cross-border trading and listings among the bourses. Its chairman envisages the formation of four regional bourses, with hub centres in Johannesburg (grouping the 15 Southern African Development Community, SADC, members); Lagos (West and central Africa) modelled on BRVM in Abidjan; Nairobi (East Africa) and Cairo (North Africa).
Unified markets will require integration of settlement systems, the harmonisation of rules for trading, for multiple listings, for capital gains and withholding taxes and regulations on foreign portfolio investment.
As a first step towards regionalisation, the SADC exchanges and the three East African bourses have harmonised their listing and trading rules. Practical obstacles to integration include the existence of different exchange rates in Anglophone Africa, the imposition of capital controls, as well as different financial reporting systems and tax regimes.
Symbol of sovereign statehood
For most countries, stock markets are viewed as a symbol of sovereign statehood, like a national airline. Hamisi Kibola, chairman of Tanzania SE said: “We have to demonstrate to our political leaders that regional integration has more benefits than petty nationalism.”
Africa is essentially a “speculative investment risk”, and brave strategic investors must be patient. But as in any other emerging markets, high risks mean high returns in the medium to long term.
Peter Wall of the IFC puts it neatly: “Much of the appeal of Africa, and emerging markets in general, is being there first” he asserts.
In order to instill investors’ confidence, individual countries need to improve their regulatory frameworks and financial infrastructure.The future of young bourses depends on how fast they can project themselves as a part of an integrated market.
The continent still faces huge challenges to improve the marketing of its investment potential and successfully compete for international portfolios with southeast Asia and South America.
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