New York — "Something very exciting is happening" on Africa's stock exchanges, says Mark Malloch Brown, the head of the United Nations Development Program (UNDP). "Returns in Africa are starting to be very impressive," he adds.
Over the past decade, nine new exchanges have been created on the continent, bringing the current total to 21 - a trend UNDP wants to encourage. Expressing a view that only the head of a development agency could voice, Malloch Brown told a two-day African Capital Markets Forum this month: "The future of Africa's stock markets is the future of the poor of Africa."
"African stock exchanges help to create wealth and the long-term capital needed for development," said Ndi Okereke-Onyiuke, chief executive of the Nigerian Stock Exchange and current chairwoman of the African Stock Exchanges Association (ASEA). UNDP and ASEA joined together to sponsor the Forum, which took place at UN headquarters and at JP Morgan Chase in the Wall Street district of New York.
Nine sub-Saharan exchanges recorded a cumulative return of nearly 18 percent in 2001 and 2002, according to a handbook released by UNDP at the Forum. Returns during the same period dropped about 30 percent on both the London and New York markets. "The cumulative performance of African Equity markets shows that over five years, most of them have outperformed key emerging markets as well as major markets indices," said Cyrille Nkontchou, managing director of Liquid Africa, an online information and transaction platform.
It's not only in Africa that African stocks are performing above average. The seven African companies listed on the New York Stock Exchange (NYSE) recorded trading volumes that were twice as great as that of all other non-United States listed firms, according to Bryant W. Seaman III, NYSE Group Executive Vice President, International.
"Further, Africa company trading volume has increased 700 percent between 1999 and 2003," he told the Forum. Calling Africa "an unparalleled opportunity" for high-growth investments, Seaman said several African companies are expected to list on the NYSE later this year or in 2004.
Two South African companies, Telkom SA and Sasol, listed in March, while Gold Fields and Harmony transferred from the Nasdaq exchange last year. The first African company to list on NYSE - and the only non-South Africa firm to date - was Ghana's Ashanti Goldfields in 1996, followed by Anglogold and Sappi in 1998.
Pension fund managers are "looking for diversity," both in sectors and geography, and "Africa is now in play," said Harold E. Doley, Jr. who in 1973 became the first African American stock broker to have a seat on the New York Stock Exchange and has long advocated closer U.S.-Africa linkages.
One reason investors both inside and outside Africa are showing new willingness to put money into African enterprises is the economic and political reforms that have taken place across the continent. "Despite conflicts in some places, most African countries are at peace," Deputy United Nations Secretary-General Louise Frechette told the Forum. "A majority of Africans now live under democratic systems led by elected leaders accountable to their people." She also credited the emergence of "a vigorous civil society" and "bold steps" taken to combat HIV/Aids in many places.
Companies listed on Africa's exchanges have grown in number from 1,771 in 1992 to more than 2200 today, the UNDP reports. The market value of these companies has more than doubled, while the value of stock market trading has increases 10-fold, to $85 billion in 2002.
The newly issued UNDP handbook lists 58 capital-raising transactions between January 2001 and January 2003 on 15 exchanges (excluding South Africa), both initial and secondary offerings, with a combined market capitalization of US$3.6 billion. Most of these were small deals, although one listing on the Namibian exchange was valued at US$1.15 billion. Nearly one-third of these transactions involved banks, followed by real estate and more than a dozen other sectors.
Most of the companies on African exchanges are also small, but there are 158 public companies valued at more than US$50 million, 67 of them in South Africa, according to Thomas Mims, founder of Emerging Africa, a New York-based publisher of data and information from the African stock exchanges. These 'African Blue Chips' are prime prospects to raise capital on international exchanges, Mims said.
In terms of market capitalization (i.e. the value of all the listed companies), there exists huge disparity among African bourses. Johannesburg's JSE Securities Exchange is dominant, accounting for three-quarters of the continent's total. The JSE has 472 listed companies, while Egypt, which accounts for another 10 per cent of market cap, has 1150 firms on its two exchanges, Cairo and Alexandria.
By contrast, five of the 18 exchanges listed in the UNDP handbook have less than 10 companies. "Africa's smaller stock markets are underdeveloped and undercapitalized," Mims said. To address the problem, he and others advocate linkages between the exchanges and cross-listings of companies on multiple exchanges.
Regional integration is "probably the direction that needs to be taken," given the small size and limited liquidity of most African exchanges, said Walter Kansteiner, U.S. assistant secretary of State for African Affairs. "The United States used to have dozens of regional exchanges," he told the Forum, while most activity now takes place on only three - the New York and American exchanges and Nasdaq.
Already, Africa has one regional exchange - the Bourse Regionale des Valeurs Mobilieres in Abidjan, which covers eight countries - Benin, Burkina Faso, Côte d'Ivoire, Guinea-Bissau, Mali, Niger, Senegal and Togo. In addition, according to Liquid Africa's Nkontchou, there has been a significant increase in companies listing on more than one Africa exchange, particular in Namibia and Uganda where most of the dual listings were from South Africa and Kenya, respectively.
Size has proved to have one advantage in Africa. Several of the smaller African exchanges have been "relatively immune to global jitters hitting stock shares worldwide," according to Robert Bunyi, senior analysts for Liquid Africa. As a result, they have often recorded higher returns than their much larger counterparts in other parts of the world.
One portfolio manager who has turned this to substantial gain is John Niepold from Emerging Markets Management LLC, based in Arlington, Virginia. "While the playing field may be a bit dicey at times, there are substantial opportunities to be found at very deep discounts," Niepold said in his presentation to the Forum. Since its inception in 1993, the EMM Frontier Africa Fund has shown a cumulative return of 38.2 percent. In 2002, the fund, which has investments in 13 countries, recorded a return of 26.8 percent, while many other funds around the world were losing ground.
Despite the results, Africa's exchanges are severely restricted by low levels of liquidity. For the most part, international emerging market investors are not investing in Africa, Nkontchou said. Most of the capital raised comes from African institutions and individual investors.
To attract more money, experts taking part in the Forum recommended a number of different steps, including both regulatory changes and infrastructure improvements.
According to Stuart Cohn, professor of law at the University of Florida, reforms are needed to make stock exchange listing more attractive for small and medium enterprises (SMEs) and to help them raise capital. "We're just not going to see that many big companies," he told the Forum. Although families and other owners of smaller companies are often reluctant to take their companies public for fear of losing control, Cohn said these concerns can be addressed by such measures as the creation of different classes of shares, a common practice in developed economies but not in Africa.
Among the factors that have contributed to stock market growth over the past decade, said Sunil Benimadhu, chief executive of the Mauritius Stock Exchange, is a "growing realization by Africa's leaders that the future lies with private capital flows." Another has been the privatizations undertaken by a number of governments as part of broader economic reforms.
To maintain growth in the future, Africa must improve its infrastructure, Benimadhu and other speakers said. Technology has a crucial role to play. Efficient telecommunications are required to support share trading and to provide the access to current information that investors demand.
Stock exchanges in Johannesburg and, more recently, in Lagos have made huge strides towards state-of-the-art technology, Doley said in an interview. "Sooner, rather then later," it will be possible "to sit in Hong Kong or Hartford and trade in Harare" and throughout Africa.
Carol Frost, research associate at Dartmouth College's Tuck School of Business, told the Forum that only 12 of the 18 active African exchanges she surveyed have web sites that work, and many of those offer only limited information. In almost all cases, improvements are needed to meet international standards and expectations, she said.
According to Nigeria's Okereke-Onyuike, stock exchanges have a vital role to play beyond that of raising capital for individual companies. She believes African governments should finance major development projects by tapping into the equity markets, which provide transparency and oversight that has been lacking with lending.
A related development also designed to stimulate capital flows to Africa is the promotion of sovereign credit ratings for countries on the continent. Both the Bush administration and UNDP have programs to pay for the first rating for African countries that are not currently enrolled with an international credit rating agency.
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Ratings set a benchmark that can facilitate borrowing by public and private sector borrowers and help underpin greater inflows of foreign direct investment," said Leo O'Neill, president of Standard and Poor's. His company currently rates Botswana, Egypt, Morocco, Senegal, South Africa and Tunisia, as well as the African Development Bank. With UNDP backing, Standard and Poor's expects to complete ratings for a number of other sub-Saharan countries this year and next, he said.
Sixteen countries have signed up for ratings sponsored by the State Department and conducted by Fitch Rating Ltd., Kansteiner said. Results have been published for Lesotho and Gambia and rating visits to Malawi and Mozambique have been completed. Countries scheduled for visits include Cameroon, Mali, Benin and Niger. Among the criteria for countries to receive assistance under the administration's proposed Millennium Challenge Account is that they have a sovereign credit rating, Kansteiner said.
With the debt burdens faced by many African governments, many of the ratings are not expected to be very high. Ghanaian Finance Minister Yaw Osafo-Maafo, said he believes "it is better to be rated low than not to be rated at all," and he said Ghana will be rated later this year.
James Harmon, a New York investment banker who headed the U.S. Export Import Bank during the Clinton administration, believes that attracting additional capital is vital for Africa's future. A high-level panel he heads is devising a 10-year plan to "open doors" for increased U.S. investment into Africa, he said. The panel, which is scheduled to issue its report in June, was convened last November by the Corporate Council on Africa, in partnership with the Institute for International Economics, the Center for Global Development, the Council on Foreign Relations and the Joint Center for Political and Economic Studies.
According to Ghana's Osafo-Maafo, Africa should be able to attract the capital it needs because the world has long recognized the continent's vast wealth. Over the centuries, he said, Ghana was visited and occupied by Portuguese, Swedes, the Dutch, the Danes and the British. "They did because this country, known as the Gold Coast, is rich."
Properly managed, Africa's economies can be "highly attractive" for investors, the minister said.
