As diverse and contrasting is the continent of Africa, so too are Africa’s capital markets. With 53 countries, the African continent has over 20 active stock exchanges, including one of the only regional stock exchanges in the world, linking eight French-speaking countries in West Africa. With a market capitalisation of over US$ 180 billion in South Africa, Africa hosts one of the largest stock markets in he world. This is in stark contrast to the other African stock markets that have comparatively small market capitalisations.
With the exception of the South African market and to a limited extent the North African markets, African stock markets are described as “frontier markets”. These markets are typically characterised by a relatively small capitalisation and liquidity levels. As a consequence, most of these markets are excluded from the main regional equity market indices and as a result attract little Global Emerging Markets (GEM) portfolio funds.
However, amid bearish performance of developed stock markets over the past two and a half years, several leading African markets such as Botswana have bucked the negative trend and recorded solid performance. Smaller African markets have proved relatively immune to global jitters hitting share values worldwide, due to their lack of correlation with developed markets. This distinct characteristic of African equity markets offers positive benefits in terms of risk diversification.
African stock exchanges face a number of challenges before they could enter a new phase of rapid growth. The most critical issue is to eliminate existing impediments to institutional development. These include a wider dissemination of information on these markets (which is one of the key achievement of LiquidAfrica.com website), the implementation of robust electronic trading systems and the adoption of central depository systems. A number of countries have already begun implementing necessary changes notably in the area of trading and settlement systems and regulatory regimes that will continue to improve.
The 1990’s witnessed a deliberate shift by a number of African governments to free market policies driven by the desire to reduce the burden on government finances.
This was achieved by implementing market-friendly reforms. A central component of this process was the privatisation of State-owned companies.
A number of these privatisation were effected by listing on the local exchanges. In order to further stimulate the development of a local capital market, many subsidiaries of large international companies were also encouraged to list their local operation. For entrepreneurs as well as emerging private companies, capital raising in African equity markets is vibrant despite the relative small size of issues.
Some African governments have taken advantage of the development of the local capital markets to issue stock exchange listed treasury debt instruments. Kenya and Ghana are a case in point, where these governments have been able to issue longer-term instruments thus better managing local debt. The spin off of this has been improved transparency in pricing of local bank lending facilities and increased competition within local banking industries. We continue to witness rapid development in the debt segment of the African capital markets.
An increasingly encouraging trend is the development of the local pension fund industry.With the exception of South Africa and to some extent Southern Africa, private and institutional cash flows have traditionally been invested mostly in real estate, term bank deposits and treasury bills. A number of African countries have introduced as part of wider financial sector reforms new laws enabling the emergence of a local fund management industry.
Looking ahead, African capital markets represent the final frontier of global capital.
Cyrille Nkontchou is founder of LiquidAfrica a company dedicated to introducing new retail and institutional investors to investing online– focusing Sub-Sahara stocks and forex. http://www.liquidafrica.com
