As international investors became more familiar with the continent, international listings and debt offerings by African companies increased as the need for capital to power investments intensified. Record low interest rates globally created an issuer-friendly debt market over the past five years, while foreign equity markets also made it easy for African companies to list. By 2013, over 100 sub-Saharan focused entities were represented on the London Stock Exchange (LSE), with a total market capitalization of $70 billion which accounted for roughly 5% of Africa’s total market capitalization.
This year, the much anticipated listing of Dangote Cement on the LSE is expected to be the latest African-based issuer. As a result of this trend, many emerging market equity players have come to prefer gaining exposure to African companies via developed world exchanges as opposed to investing via the issuer’s local bourse.
Nonetheless, due to the increase in interest rates in the United States (US) and subsequent weakening of local currencies relative to the US dollar and other major funding currencies, this trend is likely to dissipate this year as repayment of foreign currency denominated bonds has become more expensive. Moreover, the implosion of developed equity markets means investor appetite for international listings may not be sufficient. For this reason, since raising capital is a continuous process, this could the perfect opportunity for Africa’s capital markets to rise up and lure more African companies from the grip of international bourses. London has remained a leading destination for African companies listing abroad for over 60 years, according to LSE. Needless to say, work is clearly cut out for the more than 23 African stock exchanges to improve their platforms to succeed in this.
Perhaps the place to start is solving the challenges of illiquidity, high trading costs and small-sized markets. In my view, the last two require the integration of regional stock exchanges, such as what has been done successfully by the BRVM in West Africa and what the East African Community (EAC) is seeking to do. In this regard, the Johannesburg Stock Exchange (JSE) could consider relaunching the Africa Board, implementing the lessons learned from the initial failed attempt in 2009. Considering the economic size of many African nations, it’ll be very expensive to operate such an exchange.
On illiquidity, there will be need for more investor education and more listings for change to occur. Surely, something is not right when the second biggest equity market in sub-Saharan Africa, Nigeria’s stock market, has a daily turnover of less than $30 million. The Nairobi Securities Exchange has 61 listings, but just 10 of those constitute roughly 90% of its annual markets liquidity. Further progress would also require African countries to harmonize their trading laws and accounting standards, set up convertible currencies and establish free trade among members.
Despite this, African capital markets have been growing and gaining recognition over the years. At the end of 2015, total market capitalisation stood at $1 trillion, up from $113 billion in 1992. African equities are now included in emerging frontier indices and Africa-focused benchmarks indices, such as the Russell Frontier Index (RFI), MSCI Emerging Markets Africa (excluding South Africa) Index, S&amp;P Africa Frontier, S&amp;P Pan Africa, and FTSE ASEA Pan Africa Index. According to PwC’s recent 2015 Africa Capital Markets Watch, over the past five years alone, there were more than 100 initial public offers (IPOs) and 336 further offers (FOs), raising a total of $41.3 billion. Furthermore, African equity markets have seen a surge in Africa-focused equity funds, such as JPMorgan’s Africa Equity Fund and the Old Mutual African Frontiers Fund, which invest directly in equity and equity-related securities of companies domiciled or listed on an African exchange.
Given Africa’s economic prospects and volatility in global capital markets, now is the time for Africa to establish its exchanges in order to offer its home-grown enterprises the services that they need, while also tapping into the growing portfolio allocations toward the continent. For Africa to emerge as an important player in the world of capital markets, a well-established capital market is necessary to provide a better alternative to its well-known rivals.
They say a journey of thousand miles start with a step – thankfully Africa has already made several steps and is closer to its destination.

On The Right Path

The once thriving Zimbabwe Stock Exchange (ZSE) is a shadow of itself. It has declined as sharply as the economy.
Last March, the African Development Bank ranked the country’s bourse as the worst performer in the region due to a lack of investor confidence. The trend is down.
At its peak, the ZSE had 79 counters, now it has 52 – with 90% of trade concentrated on the top market capitalization companies.
The ZSE saw turnover value fall from $66 million year-on-year in August 2014 to $17 million in September this year.
According to analysts, President Robert Mugabe’s inconsistent policy and controversial indigenization laws have pushed even the most resilient investors from the exchange.
The ZSE’s Chief Executive, Alban Chirume, says the country’s bourse was also suffering after the global financial crisis.
“Most companies on our exchange are failing to raise capital with foreign investors having somewhat withdrawn participating on our market,” says Chirume.
He added that international investors were wary of investing in Zimbabwe because of the country’s risk.
The exchange lost more than $1.7 billion in value for the 12-month period ending August 31, 2015.
“The bourse’s market capitalization stood at $5.2 billion in August 2014 but has been in free fall since then and is now valued at $3.5 billion, a 32.69 percent decline,” reported a South African business news website.
The decline in disposable incomes is also believed to be forcing large capitalization companies from the bourse.
Momentum SP Reid Securities’ Pan-African Sales Trader, Sebastian Gumbo, says large capitalization companies, like Delta Corporation, have not been spared economic hardships. He says the beer and soft drink company has seen a drop in volume, especially with high-margin products.
“The beer and soft drink company saw a sharp drop as consumers’ base has been moving to cheaper lower margin products, like opaque beer and Maheu,” says Gumbo.
In an attempt to stem losses, Harare has been revising some of its controversial laws.
Mugabe’s deputy, Emmerson Mnangagwa, in July, said government was working on reform to win back investors.
Leading economist, John Robertson, blames Mugabe’s Zanu–PF party for the decline.
“At the core of Zimbabwe’s economic malaise is the controversial and disastrous land reform program, rising costs of production and the indigenization policies driving away investors,” says Robertson.
“Zimbabwe should also have reduced the wage bill costs as the country does not have the leverage of devaluation of the US dollar.”
Twenty seven counters stopped trading on the ZSE since the economy was dollarized in February 2009.
Robertson says the country’s woes have been worsened by rising labor costs. He says this is a result of the strengthening dollar, since 2011, as commodity prices fell.
“Due to rising production and labor costs, the country has seen no more production as companies now import goods they used to produce, the factories are now warehouses. We have become a nation of buyers and sellers and we have turned consumers into dependents of people working in the diaspora.”
Big companies are cutting back. Analysts say this is a sign of the tough trading conditions.
“Most companies are either retrenching or changing their business models in an effort to sustain operations,” says one analyst.
The Division Chief of the Reserve Bank of Zimbabwe, Simon Nyarota, said in June, activity on the local bourse was a reflection of the slowdown in the economy.
“Since 2009, a total of 14 counters were suspended and 15 counters were delisted from the stock exchange,” he said.
It all means more uncertainty for an exchange that used to be the jewel of Southern Africa.

how Zimbabwe stocks lost $1.7 Billion in a year

Kenya’s nascent mutual fund industry is becoming an important component in the country’s financial landscape. With increasing international focus on frontier economies, the country is slowly emerging as an investment destination for foreign investment funds seeking exposure in East Africa.
Moreover, the emergence of a thriving middle class is also creating capital flows for local asset managers. The industry, which is regulated by the Capital Markets Authority (CMA), now commands $430 million in assets under management, having grown at a compound annual growth rate (CAGR) of 21.2% since 2010, according to PricewaterhouseCoopers’ (PwC) Africa Asset Management 2020 report.
For a long time, growth in Kenya’s mutual fund industry was subdued due to an underdeveloped capital market. Until 2006, equity transactions were still being done through the floor-based open outcry system, share certificates still served as proof of ownership, trading hours were limited to two hours, trade settlements took four days and less than 50 entities were listed at the Nairobi Securities Exchange (NSE). As a consequence, by the close of 2005, only five investment funds operated and total market capitalization accounted for less than a third of its gross domestic product (GDP). This state of affairs seriously hampered Kenya’s capital markets as an important investment destination.
However, since 2006, all this changed drastically with the number of listed companies increasing to 63 and the total market capitalization rising to nearly 41% of GDP by the end of last year. Between 2006 and 2014, equity turnover doubled to $2.15 billion, Kenya managed to successfully issue its first sovereign bond which raised a total of $2 billion, the number of operating investment funds grew to 71 and the NSE received approval to demutualize and self list on the exchange. In April, the top foreign investment funds investing in Kenya had at least 25% of their funds allocated in the country, according to PwC research.
Despite this growth, the fund industry has a long way to go as it still accounts for an extremely small share of GDP at 0.7% and 0.8% of total financial sector assets. Among other reasons, a poor savings culture in the country has been blamed for the small size of the industry. The World Bank puts Kenya’s saving rate at around 12 to 13% of GDP which is half the average for all low-income countries (at 26% of GDP) and slightly lower than Africa’s rate which stands at around 17%. Furthermore, with wealth distribution highly unequal, the fund market has relied almost entirely on institutional investors. The young industry also has to deal with rising competition from other alternative investment vehicles such as the real estate sector and private equity.
Nonetheless, a combination of certain fundamental factors are likely to drive the mutual fund industry’s speedy growth in the coming years. These factors are stable economic growth, strong market performance, widespread adoption of mobile technology which makes delivery of new products cheaper, introduction of new asset classes, cross listings, loosening of regulations, political stability, investor education and the emergence of the middle class. The latter, which now stands at 44.9% of Kenya’s total population, is projected to grow at an average of 5% every year. The expansion of this group will be instrumental in driving demand for mutual fund products such as equity and fixed-income funds.
In addition, government’s agenda to grow the financial sector as stated through the Vision 2030 development program will also boost the mutual fund industry. Through the recently launched Kenya Diaspora Policy, funds can expect to tap into the ever increasing diaspora remittances. Since the CMA has been keen to market Kenya’s financial markets through diaspora conferences, mutual funds can expect to be a major beneficiary. According to the CMA, remittances inflows have risen from $408 million in 2006 to $1.43 billion in 2014, or the equivalent of a CAGR of 15%. Average monthly remittances now stand at over $100 million. Kenya’s government estimates that 15% of the remittances are used in productive investments.
The future is indeed bright and there is little doubt that Kenya’s mutual fund industry will grow to become a strong player within the finance sector and the economy at large.

Tag: Capitalization

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On The Right Path

how Zimbabwe stocks lost $1.7 Billion in a year

Growing In Leaps And Bounds