African markets want more business

2014-05-18 15:00

The Nigerian Stock Exchange said in March this year it had plans to grow its exchange to $1?trillion (R10.4?trillion) by 2016.

There has also been talk that the Nigerian Communications Commission (NCC), which regulates the telecoms industry, may force telecoms companies to list on the exchange as part of their licence conditions,?although the NCC has not confirmed it.

This will include companies like MTN Nigeria.

African stock exchanges are growing, but the immediate focus should be on turning short-term inflows into long-term investments, according to Ernst & Young’s Africa Business Centre.

Michael Lalor, the director of the business centre, said stock exchanges across Africa were still very immature. They were also not particularly deep and tended to attract short-term capital.

“It’s a double-edged sword and we feel it in South Africa because of the size and maturity of our stock exchange, where money comes in and goes out.

“It has a short-term impact on our currency and we rely on that to fund the shortfall in our current account deficit,” said Lalor.

According to the EY 2014 Africa Attractiveness Survey, positive perceptions about Africa have been growing and foreign direct investment (FDI) into the region has reached its highest level in a decade.

The number of FDI projects in sub-Saharan Africa grew from 213 in 2007 to 621 last year.

African stock exchanges have also blossomed. The JSE is still by far the biggest. According t o a research report by Deutsche Bank, the JSE represents 38% of all listed companies and 83% of total market capitalisation in sub-Saharan Africa.

“Sixty-eight of sub-Saharan Africa’s 100 largest companies in terms of market capitalisation are listed on the JSE, including the five largest companies in Africa.”

In sub-Saharan Africa, portfolio investment is focused on the most active and liquid stock markets?–?South Africa, Nigeria, Kenya, Mauritius and Zimbabwe.

Nigeria is the continent’s second- largest stock exchange and in 2012 accounted for 7.7% of total market capitalisation in sub-Saharan Africa.

Lalor said companies listed on the exchange where they operate.

“The ones with a longer-term presence do list?–?you’ll find Unilever listed in Nigeria and Ghana, British American Tobacco is listed in several stock markets in east Africa and Zimbabwe; Diageo, for instance, all its east African breweries are listed in Kenya; and Guinness Nigeria is listed in Nigeria. So I think it’s those companies with deeper roots,” said Lalor.

“I don’t think at this point you will find newer companies coming in other than in South Africa, where there would be some sense in raising capital. As the markets deepen, as the financial market starts to mature, as the financial services and insurance sectors start to build, no doubt you will find that will grow.”

Other stock exchanges on the rise include the Nairobi Stock Exchange, which grew from a market capitalisation of $14.7?billion in 2012 to $22.33?billion last year.

From a sector perspective, mining and metal companies account for 23% of the market capitalisation of the 100 largest companies listed in sub-Saharan Africa.

“But also consumer-oriented industries and financial services have a significant and increasing share among Africa’s top 100 companies, illustrating the region’s growing focus on an increasingly active middle class requiring consumer goods and access to finance.

“After resource companies, consumer goods constitute the second-largest sector by market capitalisation followed by banks and financial institutions, telecoms, retail and insurance industries,” the report said.

Listing on local stock exchanges allows a company to have a country presence and put some equity ownership in the hands of locals.

But Lalor said governments in Africa should, in the short to medium term, focus on attracting long-term capital and encourage investment into infrastructure developments.

There has been a move towards regional integration among exchanges to make African capital markets more attractive.

According to the African Development Bank, one of the big challenges in implementing this are resource and capacity restraints, as well as regulatory issues.

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