Investors look to stock exchanges to tap into African growth

Facing subdued growth at home, a growing number of Western investors are now looking to Africa’s “frontier markets” for high returns and hoping the continent’s budding exchanges can help them tap in.
The IMF predicts sub-Saharan Africa’s economy will expand by 5.1 percent this year and 5.8 percent in 2015 — the highest growth outside Asia — despite the heavy economic toll from the Ebola epidemic.
“The Americans are beginning to take a look, the whole world is looking, because it’s the last big territory with a lot of opportunities for fast growth,” said Hubert Segain, a partner at law firm Herbert Smith Freehills, at a recent conference.
This new appetite for African investments has driven a proliferation of stock exchanges across the continent, with countries such as Mozambique, Uganda and Tanzania setting up their own markets.
“In the 1990s, there were a dozen, today they have more than doubled,” said Segain.
These markets offer African companies a means to access Western capital in a stable and transparent environment, governed by more defined rules than private investments.
The BRVM exchange based in Ivory Coast, which covers eight west African countries, already gets more than half of its volume from international investors, according to its chief executive.
Western exchanges are also looking to get into the game, linking up with their African cousins and tempting companies to double-list.
Segain said more than 10 African companies, or those with assets on the continent, have debuted recently on the London Stock Exchange, one of the world’s largest equity markets which has been on a marketing drive on the continent.
“Double-listing is one path we are exploring, but the heart of our approach” is “the sharing of good practices and sharing technologies,” said Anthony Attia, chief executive of Euronext Paris.
The exchange operator in March signed a cooperation deal with Algeria’s stock exchange and agreed to provide Tunisia and three Middle Eastern exchanges with trading technology.
– ‘Financial arms race’ –
But the potential for profits also comes with many challenges.
“The first hurdle is seeing Africa as a single entity. It brings together very different geographical areas with varied levels of political and economic stability,” said Attia.
Another major problem is liquidity, as there are still only a limited number of players in Africa’s financial markets.
Liquidity is important because it allows investors and companies to be flexible with their holdings. Without it, it can be difficult to find buyers and sellers of shares.
BRVM, which started up in 1998, has only 37 companies from eight countries listed. Its chief executive Edoh Kossi Amenounve believes it will take another five or six years for it to reach a decent size.
“Asset managers are essentially local… there are very few foreign funds operating on African stock markets,” said Jean-Jacques Essombe, a partner with Paris law firm Orrick Rambaud Martel.
South Africa has by far the most developed market on the continent, with around 400 companies listed, followed by Egypt and Nigeria, both with around half of that, said Segain.
The Johannesburg-based JSE is also far and away the largest by market capitalisation, with $378 million, more than four times as much as its nearest rival Nigeria.
“Levels of market capitalisation are low, as are trading volumes, which represent an obstacle for investors,” noted Karim Zine-Eddine, director of research at Paris Europlace.
The variety of legal and financial systems in Africa, coupled with a lack of financial infrastructure, also present difficulties.
“There should also be more regulation, but not too much, because it must incorporate the cultural aspects of the countries concerned,” said Essombe.
Regional exchanges, such as Ivory Coast’s BRVM exchange, are one way to smooth out national differences.
But, said Segain, this can cause problems as a stock market is often seen “as a tool for sovereignty”, and so regional exchanges can prompt “a kind of financial arms race” between countries.
Crucially, share markets need to tailor their services according to their clients, as the needs of an African and US investor are not the same, said Orrick Rambaud Martel partner Pascal Agboyibor.
“The most important thing is to work first on a local ecosystem and not try to copy international models,” said Attia.