African Bourses: Top Performances Reveal Hidden Potential; African Bourses, Shielded from the Sort of Global Turbulence That Has Affected More Mature Stock Exchanges, Have Performed Exceptionally Well. but, Moin Siddiqi Says, South Africa Apart, There Is Still Plenty of Room to Improve
Siddiqi, Moin, African Business
The turbulence of the mainstream Western stock markets, and the low yields offered by the traditional safe-haven government debt of the US, Europe and Japan, has left institutional investors with little option but to take defensive measures. But if they were prepared to take on a little more risk in their search for decent earnings, the market for Africa's equities, bonds and treasury bills offer real opportunities.
What makes African markets so much more interesting than the major emerging markets of South America, notably Argentina and Brazil, and the East Asian emerging markets of Hong Kong, Korea, and Taiwan, is that South American and Asian markets have a higher 'correlation coefficients' with the New York and Tokyo stock exchanges. This means that they usually rally or nosedive broadly in line with overall trading environments in the US and Japan.
By contrast, African countries (with the notable exception of South Africa) are less integrated within global marketplace and less exposed to adverse external shocks such as adjustments to interest rates or major corporate bankruptcies.
In fact, the exposure to African markets would be highly suitable as part of a risk-diversification strategy for foreign investors because the continent's fledgling bourses are 'semi-detached' from the stock markets of the developed world.
Moreover, capital flows and market fundamental--rather than speculative trade driven by derivative products, options and futures where most Western hedge funds make their money--more readily affect African share prices.
Africa now boasts 19 operational stock exchanges, compared with just six in 1988. The Sub-Saharan Africa (SSA) bourses are dominated by the Johannesburg Stock Exchange (JSE), which comprises 90% of the aggregate capitalisation of SSA, and 80% of the entire continent.
North of Johannesburg, SSA bourses are classified as 'frontier markets'--one status below emerging markets (EMs). They tend to be very small and lack liquidity even by EM standards, though they may be open to foreign portfolio investment.
In 2003, SSA capitalisation, excluding the JSE, totalled about $28bn, roughly equivalent to the size of the Egyptian bourse founded in 1888.
Whilst the financial and consumer sectors form the most important components of the majority of SSA bourses, industrial and IT stocks have higher weightings on the JSE.
Besides a raft of world-class blue-chip stocks listed on the JSE--such as Anglo-American (resources), Richemont (luxury goods), SABMiller (brewing), Standard Bank Group (finance) and the MTN Group (telecoms), the dedicated investors can find good indigenous African stocks that provide shareholder value both in terms of capital gains and dividend income.
Some notable African stocks that fall into this category include Ecobank, Union Bank of Nigeria, Orascom Telecom (Egypt), Sonatel (the Senegalese telecom group), Econet Wireless (mobile telephony), Nigerian Breweries, New Mauritius Hotels, Bidco Oil (Kenya), Kenya Airways and ZCCM Investment Holdings (Zambia).
Dr Ndi Okereke-Onyiuke, director-general of the Nigerian Stock Exchange, and head of the African Stock Exchanges Association, says: "Many companies quoted in Africa are still in the expansion stage. Many of us make over 200% on our investments."
Bryant W Seaman, the vice-president of the international division of the New York Stock Exchange also says that Africa offers "an unparalleled opportunity for high-growth equity investment".
African companies stand to benefit from a newly formed Emerging Markets Small Capitalisation Fund. The fund-in which the International Finance Corporation (IFC) is a principal investor-will target listed companies with a market capitalisation below $500m.
Teresa Barger, the IFC's director for private equity-investment funds, says: "Investors and market researchers often pay too little attention to smaller listed companies, especially in the emerging markets. …