Africa Frontier Markets Attract Rogue Investors

Published on 22nd July 2008

Foreign direct investment (FDI) is one of the most coveted forms of investment for African countries. Most African countries go to great lengths to market their countries as  perfect  FDI destinations.East African countries have enjoyed favorable FDI since they are considered to be havens of peace in a region full of turmoil. The recently ended Safaricom IPO in Kenya and Celtel Zambia IPO have  however indicated a very different type of investment from foreigners.

Apart for the Johannesburg Stock Exchange (JSE) in South Africa, all other bourses on the continent are considered by ‘outsiders’ – from developed countries, to be frontier markets. A ‘Frontier market’ is a pre-emerging market probably much undeveloped with high political risk and potentially huge returns. Only the bold and crazy investors from developed markets venture into such markets for short term but handsome returns.

The recent meltdown of the developed securities market due to high oil prices and bleak inflation outlooks has made investors in developed countries to rethink the frontier markets. Despite the high risk associated with them, frontier markets such as Africa have proven to be best avenues for foreign investors to diversify their investment. Already big foreign fund management firms such as Morgan Stanley are taking notice of the potential of the continent and are forming linkages with internal players to help tap into frontier markets.

But looking at the foreign investors that came in to buy in the Safaricom and Celtel Zambia IPO, a lot is left to be desired about the kind of foreign investors Africa is attracting. It has always been thought that foreign investors are more analytical than speculative in their stocks picking and trading. So it came as a big surprise to many at the Nairobi Stocks Exchange (NSE) when foreign investors bolted out of their buys immediately the Safaricom shares indicated some sign of gains. These has to date left Safaricom share price dampened and on a constant downwards trend. The same scenario is the case with Celtel Zambia.

Analysts consider a market to be at the peak/optimum of its growth path when it starts attracting large foreign mutual funds. This usually exposes the market to a lot of scrutiny in terms of operations and information asymmetry and makes it difficult for any investor to make huge gains out of unbalanced information that giving him unfair advantage. The presence of such foreign investors helps in the growth and development of frontier markets.

One curtailing issue to foreign investors is the lack of transparency in these frontier markets. Information about African companies is as scarce as it can be with insider trading and share manipulation being the order of the day. These discourage both foreign mutual fund managers and individual investors from venturing into African markets, leaving only the rogue investors, some of them dubious dummy companies formed by locals, to have a field day in investment opportunities presented to foreign investors by African governments.  

Although foreign mutual funds that invest in frontier markets are still very limited, the creation of the S&P index to monitor these markets is a great step towards transparency. S&P frontier market index tracks 30 companies in 27 countries including Kenya, Nigeria, Tunisia and Ivory Coast. MSCI Barra also has a frontier markets index called the MSCI Frontier Markets Indices. The index covers 19 countries from Africa, Middle East, Asia and Central & Eastern Europe.

As African bourses seeking to grow and attract more favorable FDI in the continent, attention should be focused on the kind of investors coming in to our markets. Stringent measures need to be put in place to ensure such rogue investors witnessed in the recent open IPO’s are locked out. In my opinion, I would suggest that a proper vetting system is put in place to ensure that all those who purport to be foreign investor are indeed genuine foreign investors. Though this may mean involvement of more time and resources, it’s worth the effort. Another suggestion would be having a lock in period for all foreign investors so as to attract more medium to long term investors.


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