Global Markets: Can Africa Stand the Test of Time?

Published on 23rd May 2006

“Money makes the world go round.”  So goes the old adage.  According to the McKinsey Quarterly, the Global Capital Market has neither been larger and diverse, nor has its power been greater to shape the wealth of nations.  Today however, it is determining the countries that businessmen ogle at while setting up their business centres.You perhaps reckon the popularity that the NASDAQ which tops in international listings with thousands of blue chip listings has had for decades.  The Wall Street has been the talk of every corporate leader eyeing the US markets.  The Dubai International Financial Market (DIFX), only a year old, has become another international hub for investors eyeing Middle East markets. 


With stock markets totalling eighteen in Africa, the pace has been quite slow.  Notably, the global trends have been marked by a shift from debt (…and more debt) and bank deposits towards debt securities.  Private debt securities are the largest component of global financial stock and the fastest growing.  According to the McKinsey Quarterly, from 1993 to 2002, they accounted for nearly half of the overall growth in global financial assets.  Africa’s capital markets have been left out of the global trends. 


The United States for example boasts of a 40% of the world’s financial stock which totals more than $ 136 trillion and is likely to exceed $ 228 trillion by 2010.  Whereas China is rising fast, Japan is quickly fading.  Integrations have also emerged with nations eyeing more bargaining prowess and trade protectionism.


China has emerged as an important player in the global capital market.  According to the McKinsey Quarterly, China has become a global hot spot growing at almost twice as fast as the world average (14.5 per cent per year since 1993) and gaining global share in almost every asset class.  In addition, it commands the second largest stock in Asia, $ 5.1 trillion which is 19 per cent of Asia’s total.


A grim reality however encompasses the African markets. According to a United Nations report, most African financial markets are still tiny and fledgling, the Johannesburg Stock Exchange (JSE) being an exception, for it accounts for over 80% of total value of the Sub-Saharan Africa in terms of market capitalization.


Some few African financial markets still continue to record astounding performances consequently landing on the global 10 in terms of returns.  A continental business magazine recently ranked Egypt, Zambia, Uganda and Kenya among the best performers. Most nations that have achieved financial market muscle have not gained it by chance. A nation will either be advantaged in terms of economic endowment or integrating resources. The ASEAN and ASEAN PLUS THREE nations have been able to capitalize on the member states to create a regional force that the world can now bow to.  Alternatively, a nation can take advantage of its natural endowment to create an empire.  A good example of this is the DIFX which has become the leading stock exchange between Western Europe and East Asia.  The country, which has taken advantage of its strategic positioning, has grown to such great heights in a short period of time (Since September 2005 when it was founded).  It is very unique in the region because its standards are comparable to those of leading international exchanges like the New York, Hong Kong and London.  It has also attracted a lot of international companies thus boosting its popularity.


Why are our markets staggering?  Why is it that all reports such as the McKinsey Global Institute’s (MGI) report on global financial markets and the Morgan Stanley Research on emerging markets exclude Africa? Our markets are excluded from the major global trends mainly because of their size and poor corporate governance. This has not only weakened the organizations but hindered the management from getting proper personnel.


The size factor can be demonstrated by the national frenzy that characterized the Ken Gen Shares in Kenya.  A company with a Return on Assets (ROA) at 5% or less can still prove very attractive to investors while those of the international counterparts attract up to as much as 15% ROA. This and a non changing management do not attract a lot of foreign investors.


In addition, our markets have still not positioned themselves for international listings.  This can be partly blamed on the political climate.  Although democracy has had its grip in more countries than it was in the past, many are yet to reposition themselves for international entrants. Although Kenya enjoys a bigger advantage in terms of listings with around 46 companies listed, it still can’t take advantage of the regional untapped market in Tanzania and Uganda.  So far, only seven companies are listed in both Tanzania and Uganda despite the underlying potential. 


With the exception of Egypt and South Africa, there is very little research that seeks development of the financial markets. Egypt’s vibrancy has seen the creation of two stock markets in Alexandria and Cairo.  The South African stock market came up with several stock indices covering almost every segment of the stock market.  This was done by the JSE in partnership with the Financial Times London.


Another noticeable trend is the market integration. Though Africa still has a deficiency for this, it could go a long way in increasing corporate trust that will attract a great deal of investors and a plethora of knowledge.  Due to its size, integrations can go a long way in shaping stock markets by creating greater market empires than can equally compare with the western giants.  The JSE is already doing this.  Greenhill, a business development manager is geared towards winning more businesses to the JSE after their fruitless efforts to create a Pan African Stock Exchange. This will be achieved by looking for companies within and out of Africa that are attractive enough to list in this 120 year old stock market.  However, such a move is not being welcomed by other upcoming stock exchanges like Nigeria, Mauritius and Egypt.  This is because JSE alone accounts for more than 80% of the overall market capitalization of all listed companies.


Recently, African Investor (AI), a continental magazine, developed an index that includes the largest companies in the continent. Evaluating seven companies in every country, the AI 40 Share Index picked the best performing companies in the continent, considering those with sufficient liquidity and market capitalization that can be of interest to investors. Such an index will go a long way in providing a guide on how investors can diversify their investment portfolio across the continent.


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