Guide to African Stock Markets
Album, Andrew, African Business
Our coverage of African stock markets have generated considerable interest among readers who wish to participate in the markets for the first time. However, many of them have written in to say that they do not quite understand how the markets work and how they can earn dividends by buying and selling shares. Our stock market correspondent, Andrew Album provides a easy-to-follow introduction to the African market and explains some of the terminology used in the bourses.
According to World Money magazine, Africa now has 16 active bourses (markets where traders meet to buy and sell shares) with a total capitalisation between them of over $260bn i.e. the monetary value of the stocks and shares offered in these markets. Three further exchanges are planned for Uganda, Tanzania and Madagascar, whilst there are also plans for a unified West African bourse.
They range in size from South Africa's huge $225bn exchange, to the market in Botswana, which has a value of under $400m and are spread across the continent, from Egypt, Morocco and Tunisia in the north, through Cote d'Ivoire and Nigeria, to Namibia, Botswana, Zimbabwe and South Africa in the south.
Whilst many have only been established in the last decade, a few have longer histories, the oldest being Egypt's Cairo exchange, which was originally set up in 1881. As these markets have grown, so have the returns. Gains of 107.5%, in dollar terms, were attained by Kenya in 1994, whilst the Ghanaian market grew by 65.39% in the same year.
The reason for this recent development is two fold. Firstly, with economic development has come increasing prosperity for some Africans. This has created a domestic base of savers, looking to protect their money against the effects of inflation and to achieve a capital return.
For investors with surplus capital, any where in the world, there have always been a choice of areas in which to invest. The first is what is described as "real assets", such as gold, precious metals, commodities, land and property. The second is interest-bearing investments such as bonds (certificates issued by governments or companies in order to raise debt on which interest is paid until the redemption date, when the notes are repurchased for their face value) and bank deposits. The third is what is known as "asset-backed" investment, which is principally shares or equities.
The second reason for the development of stock markets across the region is also linked to economic development. For less advanced economies, most businesses in private ownership are usually small, family owned concerns. Most growth and investment is financed internally, or from loans made by banks or other lending institutions.
As businesses grow, they reach the stage where they are simply too large to remain under family ownership or where needs for capital to fund expansion cannot simply be provided by banks. For instance, projects may be of a longer term nature, where the company cannot meet interest payments out of immediate cash flow, or where the investment is considered too risky by lending institutions which are traditionally cautious by nature.
Such companies then have to look for new sources of capital. The easiest way to do this is to issue shares, thereby giving the lender the potential to benefit from the profits yielded by investment and expansion. Stock exchanges provide the means by which investors can find companies in which to invest and to give them the opportunity to sell their stake whenever desired.
With the development of African economies and the emergence of larger businesses, there has arisen a greater need for investor capital and, accordingly, the establishment of a number of bourses across the continent. An efficient stock market is a prerequisite for economic development in modern times, allowing companies to expand, invest and develop, as well as enabling shares to be traded and priced easily.
There are two principal ways in which investors can buy equities in companies. The first is by directly holding shares in individual companies. The second is by pooling resources with other investors and employing experts to manage the money on your behalf. "Pooled investments", as they are known, have increasingly come to dominate the global investment scene in recent times. Examples include pension funds and mutual funds (as they are known in the United States) or unit trusts and investment trusts (in Britain).
Anyone seeking to take advantage of investment opportunities in Africa has three options: The first is to invest directly into individual African companies such as Chromecorp of South Africa, Cote d'Ivoire's Somiaf or the Kenyan tea producer Sasini. Shares will need to be purchased on the domestic exchange on which they are traded. This will entail transacting through a local broker. The whole process can be complex and costly to arrange. Furthermore, it can leave you without a sufficient spread of companies, whilst the shares may be difficult to sell in a hurry. Consequently, many investors choose to shun this route.
To gain exposure to a better range of companies, many African countries, such as Egypt, Morocco and South Africa have domestic mutual funds. This gives you access to the expertise and knowledge of local experts, who manage the funds on behalf of all investors.
Each investor, meanwhile, holds a share in the fund which rises or falls as the value of the fund increases/decreases. There is obviously a cost as the fund managers will charge an annual fee for the service they provide, typically 1-2% of the value of the fund, but the theory is that the superior returns they hope to provide more than compensate for this.
To date, international investment houses have not established single African country funds in the way that some have elsewhere. However, Old Mutual does run a South Africa fund, whilst Framlington is exploring the possibility of launching an Egypt Fund.
Rather than invest in a single country, many investors prefer to spread their risk and gain exposure to a broader range of African markets by investing in a regional African fund.
The principal pan-African fund is the Morgan Stanley Africa Investment Fund, a closed-ended fund listed in New York, with a capitalisation of $250m. Two recent editions are the $100m Simba fund (featured in the January 1996 edition of African Business), which was launched late last year by Baring Asset Management. Based in the Channel Islands tax haven of Guernsey, the Simba Fund, whilst open-ended, is closed to redemptions until December 2000. It is principally geared towards institutional, rather than private, investors. The other key continent wide fund is managed by GT Management Plc and has a capitalisation of $75m (featured in the December 1995 edition).
There are also more specialised funds. The ones currently operating concentrate on countries in North Africa and the Middle East. Foreign & Colonial, an investment house with a reputation for its specialisation in emerging markets, launched such a fund in October 1994. The Foreign & Colonial Emerging Middle East Fund Inc is listed on the New York Stock Exchange and is valued at over $36m, Scottish based Martin Currie also run a Middle East fund which is called The Near East Opportunities Fund Ltd, although its African investments are limited to the Cairo exchanges.
Many options available
Janet Chisholm, a research analyst at London based Fund Research says that she "expects to see considerable expansion of available funds in the months and years ahead."
For investors who do not wish to restrict their emerging markets holdings to Africa, but would prefer something more widely-spread, there are a large number of options available. For instance, the $237m Foreign & Colonial Emerging Markets Investment Trust Plc, which is quoted on the London Stock Exchange, invests globally, and currently has an exposure of more than 10% on African bourses. Global emerging market funds are operated by most leading investment houses, such as Schroders, Templeton, Gartmore and the like.
What to look for
Before rushing into any investment in African equities, buoyed by the optimistic predictions made by the managers of recently launched African funds, a word of warning should be given. Emerging markets, by their nature, are very volatile and prices can plummet just as quickly as they can rise. So, whilst the rewards can potentially be great, so are the risks. Other drawbacks of emerging markets include the following.
* The marketability of shares may be restricted and liquidity can be very low.
* Companies are often not subject to the same disclosure, accounting, auditing and financial standards which apply in more mature markets.
* The quality and reliability of official data cannot necessarily be relied upon.
* Many African companies are heavily dependent on the export of commodities and natural resources and are therefore extremely vulnerable to changes in world prices for these products.
* Exchange rate fluctuations and currency devaluations can affect the value of investments.
* Political instability and the possibility of conflicts, wars or coups mean that there are significant additional risks involved.
Provided you are aware of the risks, then the rewards can be tempting. As Mr John Legat of GT Management's recently launched Africa Fund enthuses, "Africa is on the threshold of a new era and will provide excellent investment opportunities." Investors who get in early may one day be very glad that they were in at the start.
* Readers who have specific queries about African markets can write to: The Editor, African Business, 7 Coldbath Sq., London EC1R 4LQ. We will either reply to you individually or publish your question and invite responses from other readers.…
Questia, a part of Gale, Cengage Learning. www.questia.com
Publication information: Article title: Guide to African Stock Markets. Contributors: Album, Andrew - Author. Magazine title: African Business. Issue: 207 Publication date: February 1996. Page number: 15+. © 2009 IC Publications Ltd. COPYRIGHT 1996 Gale Group.
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