The Comparative Performance of African Stock Markets: Nominal, Real and U.S. Dollar Returns

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ABSTRACT

This paper compares the performance of ten of the largest stock markets in Africa during the ten-year period, 1993 to 2002. The stock markets of Botswana, Egypt, Ghana, Kenya, Mauritius, Morocco, Nigeria, South Africa, Swaziland and Zimbabwe are compared with respect to their nominal local currency returns, inflation-adjusted local currency returns, and U.S. dollar returns. Performance is measured under two investment strategies. The lump-sum strategy uses the end-of-period values of equal beginning-of-period investments in the ten stock markets. Using this strategy we find that Zimbabwe's stock market had the greatest nominal return while Kenya's had the lowest return; Botswana's stock market had the best inflation-adjusted return while the stock market of Kenya had the worst return; and Zimbabwe's stock market had the best U.S. dollar performance while Swaziland's stock market had the worst U.S. dollar performance. The annuity strategy assumes equal annual investments in the stock markets. Using this strategy we find that Zimbabwe's stock market had the greatest nominal return while Kenya's had the lowest return; Botswana's stock market had the best inflation-adjusted return while the stock market of Kenya had the worst return; and Zimbabwe's stock market had the best U.S. dollar performance while Kenya's stock market had the worst U.S. dollar performance. This methodology leads to performance rankings which could be at variance with those obtained using average returns. The results of this analysis address the ability of these stock markets to function as wealth preservation and enhancement vehicles to local investors as well their ability to meet the needs of foreign portfolio investors.

JEL Classification: G1, O16

Keywords: African stock exchanges; Equity market performance; Emerging markets; Stock returns; Inflation; Portfolio investment

I. INTRODUCTION

The performance of equity markets is obviously important to investors. Equity market performance is also of interest to policymakers because stock indices are recognized as leading indicators of economic activity. The level of stock prices can also have a direct impact on consumption via the wealth effect.

Given the importance of stock markets, studies of their role in African economics are few and far between. Studies of the comparative performance of African stock markets are even rarer. This paper is an effort to fill the void in this area of study. We compare the performance of ten of the largest stock markets in Africa during the ten-year period, 1993 to 2002. The stock markets of Botswana, Egypt, Ghana, Kenya, Mauritius, Morocco, Nigeria, South Africa, Swaziland and Zimbabwe are compared with respect to their nominal local currency returns, inflation-adjusted local currency returns, and U.S. dollar returns.

A major goal of this study is to discover how well African stocks have performed as hedges against inflation. It is no secret that African nations have had some of the highest rates of inflation in the world over the past three decades. The relevance of equity securities in Africa depends to a large extent on the degree to which African stocks have ameliorated the impact of inflation on savers and investors.

There are several studies of common stocks as inflation hedges in developed economies. Since common stock represent ownership of real assets, their returns should be independent of the rate of inflation; this is the Fisher hypothesis. Thus, an increase in the rate of inflation should be reflected in an equal increase in the nominal return on stocks. Bodie (1976) and Nelson (1976) found, however, that stock returns were negatively correlated to both anticipated and unanticipated inflation in the United States.

This negative relationship between stock returns are inflation is not unique to the United States. Owusu-Frimpong (2001) found that Ghana's stock market performed poorly during periods of high inflation in the mid-1990s. …