Wednesday, February 07, 2007

“Why isn't Africa Attracting Portfolio Investment?”

The past 20 years have seen Africa open more stock exchanges than any other region in the world. Some of African exchanges have been the world’s top performers, but that has not attracted the attention of international portfolio investors. But why? The World Bank’s PSD Bloggers had the following to say:

Why do the global emerging market funds ignore African-listed securities? Are mutual funds discriminating against Africa?

Not at all, said Todd Moss from the Center for Global Development in a presentation on his recent work to Bank staffers yesterday. Turns out there's no market failure at all. The problem lies with the African stock exchanges themselves.

Despite their recently good performance (as described in a prior post), Sub-Saharan African stock exchanges lose out because of their small size and very low liquidity. As he put it, "the New York Stock Exchange trades more before tea than all of Africa trades in a year." The glaring exception is the Johannesburg Stock Exchange (JSE), which is as large and popular as any emerging market stock exchange.

The bottom line - a stock exchange must have $50 billion in market capitalization and $10 billion in value traded to attract any interest from global emerging market funds. Of the 15 African exchanges, only South Africa hits either metric.

Moss thinks African exchanges might get a boost from large privatizations, but argues that the real key is to focus on investment climate issues. Big home-grown firms, hungry for equity finance, are needed to build up stock markets, which in turn attract mutual fund managers.

So where are the big African companies? Barriers to entry keep African firms out of the formal sector. Once they formalize, barriers to growth - such as higher infrastructure costs and "unofficial payments" - keep African firms small. For more on these barriers to growth, see the World Bank paper "Business Environment and Comparative Advantage in Africa: Evidence from the Investment Climate Data" from Benn Eifert, Alan Gelb, and Vijaya Ramachandran.

. . .

Kenyanomics Says: Doesn’t that make merging of African stock exchanges more reasonable?

20 comments:

Louis said...

i think most major funds are using south africa as the base in which to invest in sub saharan africa so for example they will invest in a company in SA. which will the expand into other african countries

coldtusker said...

The difficulty in investing on African stock exchanges is legendary!

NSE - The brokers ignore local customers let alone foreigners!

USE - No CDS & they trade thrice a week!

ICT can play a role by combining these exchanges & offering trading platforms... Long way to go!

Kenyanomics said...

Todd Moss, a researcher with the Center for Global Development wrote a very elaborative book, i.e: "Adventure Capitalism: Globalization and the Political Economy of Stock Markets in Africa."

He sees the small size of African exchanges as a major disadvantage. He at one section points out that NYSE trades more before tea than the entire Africa (excluding S. Africa) trades in a year.

Robert said...

Combining Africa's exchanges to create a super exchange is a bad idea, it doesn't address some of the basic issues that a re missing or completely wrong in Africa's markets ... need a day just to illustrate these issues. Top most in my mind is the patrimonial systems (cliques/mafia/cartels) that inhibit startups. Come to Kenya and attempt to introduce an innovation, the current players will run to government to stop you, muscle you out so quickly you'll wnder if you've landed in the wrong country. This region needs to seriously address barriers to entreprenuership. Once this is done equity capital hungry companies will emerge and the markets will fall in line. Have a look at www.mavuno.typepad.com BTW.

Rudi Scholtz said...

can investing in south africa (the JSE) be an alternative way. I know there are a view stocks listed with interests in the congo and Zimbabwe

http://bluvestments.blogspot.com/

ilanit said...

In September I would have speculated that MS would not be treating a first-tier Los Angeles private equity firm like Blackstone this way. But as the Fall has progressed and the potential liability increased it is clear that banks are willing to risk even their largest clients to wriggle away from some of these deals.

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