Top performances reveal hidden potential

African bourses: Top performances reveal hidden potential

Siddiqi, Moin

African bourses, shielded from the sort of global turbulence that has affected more mature stock exchanges, have performed exceptionally well. But, MOIN SIDDIQI says, South Africa apart, there is still plenty of room to improve.

The turbulence of the mainstream Western stock markets, and the low yields offered by the traditional safe-haven government debt of the US, Europe and Japan, has left institutional investors with little option but to take defensive measures. But if they were prepared to take on a little more risk in their search for decent earnings, the market for Africa’s equities, bonds and treasury bills offer real opportunities.

What makes African markets so much more interesting than the major emerging markets of South America, notably Argentina and Brazil, and the East Asian emerging markets of Hong Kong, Korea, and Taiwan, is that South American and Asian markets have a higher ‘correlation coefficients’ with the New York and Tokyo stock exchanges. This means that they usually rally or nosedive broadly in line with overall trading environments in the US and Japan.

By contrast, African countries (with the notable exception of South Africa) are less integrated within global marketplace and less exposed to adverse external shocks such as adjustments to interest rates or major corporate bankruptcies.

In fact, the exposure to African markets would be highly suitable as part of a risk-diversification strategy for foreign investors because the continent’s fledgling bourses are ‘semi-detached’ from the stock markets of the developed world.

Moreover, capital flows and market fundamentals – rather than speculative trade driven by derivative products, options and futures where most Western hedge funds make their money – more readily affect African share prices.

Africa now boasts 19 operational stock exchanges, compared with just six in 1988. The Sub-Saharan Africa (SSA) bourses are dominated by the Johannesburg Stock Exchange (JSE), which comprises 90% of the aggregate capitalisation of SSA, and 80% of the entire continent.

North of Johannesburg, SSA bourses are classified as ‘frontier markets’ – one status below emerging markets (EMs). They tend to be very small and lack liquidity even by EM standards, though they may be open to foreign portfolio investment.

In 2003, SSA capitalisation, excluding the JSE, totalled about $28bn, roughly equivalent to the size of the Egyptian bourse founded in 1888.

Whilst the financial and consumer sectors form the most important components of the majority of SSA bourses, industrial and IT stocks have higher weightings on the JSE.


Besides a raft of world-class blue-chip stocks listed on the JSE – such as Anglo-American (resources), Richement (luxury goods), SABMiller (brewing), Standard Bank Group (finance) and the MTN Group (telecoms), the dedicated investors can find good indigenous African stocks that provide shareholder value both in terms of capital gains and dividend income.

Some notable African stocks that fall into this category include Ecobank, Union Bank of Nigeria, Orascom Telecom (Egypt), Sonatel (the Senegalese telecom group), Econet Wireless (mobile telephony), Nigerian Breweries, New Mauritius Hotels, Bidco Oil (Kenya), Kenya Airways and ZCCM Investment Holdings (Zambia).

Dr Ndi Okereke-Onyiuke, director-general of the Nigerian Stock Exchange, and head of the African Stock Exchanges Association, says: “Many companies quoted in Africa are still in the expansion stage. Many of us make over 200% on our investments.”

Bryant W Seaman, the vice-president of the international division of the New York Stock Exchange also says that Africa offers “an unparalleled opportunity for high-growth equity investment”.

African companies stand to benefit from a newly formed Emerging Markets Small Capitalisation Fund. The fund – in which the International Finance Corporation (IFC) is a principal investor – will target listed companies with a market capitalisation below $500m.

Teresa Barger, the IFC’s director for private equity-investment funds, says: “Investors and market researchers often pay too little attention to smaller listed companies, especially in the emerging markets. The Fund will demonstrate the value of investing in this sub-asset class. IFC’s engagement will help to attract other private sector investors and increase trading volumes and liquidity.”

So far, SSA has attracted just a few foreign funds, namely Morgan Stanley Dean Witter’s Africa Investment Fund, HSBC Equator Bank’s Africa Growth Fund, Africa EM’s Fund, (which invests in newly privatised stocks), Framlington West Africa Growth Fund, and Save & Prosper Southern Africa Fund.


Last year, most African bourses managed to outperform mature and emerging markets thanks to rising commodity prices and sound fundamentals, i.e. the buoyant economic growth combined with lower inflation registered in most countries. Strong domestic demand and declining interest rates have also helped to fuel the corporate earnings of many African companies.

The JSE All-Share index rose 21.8% during 2004, hitting a fresh high of 12,675 points on December 30 2004. The JSE started 2004 standing at 10,387, and throughout last year was supported by impressive results from natural resource exporters and local retailers.

In dollar terms, South Africa’s market gained 47.3%. According to figures from the Emerging Market Trade Association, South Africa debt-and-equity instruments were among the top-three local plays of 2004.

The prospects of substantial foreign capital inflows into mining and banking sectors, and rumours of a sovereign ratings upgrade, have raised blue-chip prices and stimulated earnings.

South Africa’s price/earnings [P/E] ratios, currently averaging 13.3, indicate an upturn in overseas investments. The takeover of ABSA bank by British Barclays Group will represent a multibillion dollar transaction. The P/E ratio is the measurement of ordinary share price to the earnings per share over a rolling 12 month period. The higher the ratio, the higher the market expectations of future earnings growth.


But rand-hedge stocks, such as AngloGold-Ashanti, BHPBilliton, Impala Platinum, Gold Fields and Sasol, that earn a major proportion of their revenues in US dollars against expenditure on local labour and capital costs incurred in rands, have been hit by the rand’s strength. The British FTSE and South African JSE ‘Resource-20’ index fell 12% over the past year.

Ghana has surged a whooping 91.2% on the All-Share index, powered by a series of initial public offerings (IPOs), rights issues and a soaring gold price. Last year, cedidebt instruments with two-year fixed and floating-rate maturities were added to the exchange. A Central securities Depository system demanded by foreign custodians was also implemented.

But, as Ghana’s finance minister, Yaw Osafo-Maafo, says: “The lack of capital is a big stumbling bloc. We need stronger marketing tools to tell the world Africa is on the move.”

The Lagos bourse jumped to a peak of 30,703 last June as oil-windfall gains boosted consumption and investments across the economy. Major stocks, including Guinness Nigeria, Nestle Nigeria, Cadbury Nigeria, Unilever Nigeria and First Bank Nigeria all posted strong profits. However, hefty capital gains were eroded by profit taking in the second half, leaving the NSE All-Share index up just 18.4% on the year.

State utilities – such as NITEL and NEPA (telecoms and electricity respectively – are scheduled for privatisation by 2007. This, in turn, should increase corporate listings, and liquidity, which is broadly a measure of the number of parties willing to trade in the market. The other markets showing a double-digit increase, in local currency terms, were Egypt (54%); Mauritius (29.3%); Côte d’Ivoire (16.7%); Botswana (15.6%); Namibia (14.2%); and Morocco (14%). The most surprising performance was the Zimbabwe (SE) Industrial index, up a stunning 173%, despite continued ‘stagflation’, problems of shrinking output and hyperinflation.

The only rational explanation for Zimbabwe’s stock market performance is the continuing negative inflation-adjusted yields on the benchmark 91-day Treasury bills and term bank deposits, combined with rigid capital controls that keep institutional and retail funds within the country. Local investors have few, if any, alternative but to invest in domestic equities.


Africa’s leading bourses appear a solid bet for 2005 with strong corporate earnings and regional output predicted by the International Monetary Fund to grow by 5.4%. That would be the highest growth in earnings and output since 1996.

The reality is that SSA has only been receiving meagre inflows of foreign portfolio equity. In 2003, African bourses attracted just $500m – representing 3.5% of worldwide flows ($14.3bn), according to the World Bank. How can Africa’s share of the world’s investment be boosted?

Except in South Africa, Africa’s bourses lag behind other EMs in terms of the technology they employ – although technology could play a significant role in the speeding-up of trading, clearance, and settlement procedures, which might tempt more international investors.

Other drawbacks that might be discouraging more investors include the size and poor liquidity of Africa’s markets, excessive red tape and high transaction charges, the weak accounting and auditing standards of some listed companies, and currency risks.

Patrick Asea, director of the economic-social policy division of the UN Economic Commission for Africa, says: “These are issues that bother investors… there is a concern about the robustness of African markets. This concern is largely to do with poor market infrastructure that results in delays in trade and settlement; lack of transparency as a result of weak regulation; and illiquid markets that prevent investors from liquidating their interests quickly.”

Future inward investment depends on more developed capital markets, privatisations and legal reforms. A proper regulatory framework is also vital to protect shareholders’ rights, enforce contracts and prevent malpractices such as insider dealing.

Besides luring foreign investment, regional governments must persuade wealthy nationals – their own high net worth individuals – to bring home some of the enormous amounts of capital that has left Africa.

The World Wealth Report (2004) compiled by Capgemini/Merrill Lynch shows that super-rich Africans possess about $600bn in offshore wealth, representing 116% of SSAs total GDP. Repatriation of even a fraction of these assets would be a major boost to the liquidity of African markets.

Copyright International Communications Feb 2005

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