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Africa can do better without fragmented stock exchanges

Richard Branson, founder of Virgin Galactic poses before ringing the First Trade Bell
Richard Branson, founder of Virgin Galactic poses before ringing the First Trade Bell to commemorate the company’s first day of trading on the New York Stock Exchange (NYSE) on Monday in New York City. AFP PHOTO 

The Absa Africa Financial Markets Index is out and is packed with valuable insights. The OMFIF-Absa report is slowly becoming a staple within the investment community.

Africa capital markets made big leaps – overall score settled at 52.7 (out of 100), up from 49.6 in 2017 - with Kenya ranking third (out of 20 countries scored). More importantly, this year’s edition (just like the previous two) confirms a couple of observations.

One, Africa needs a single exchange (not shallow and illiquid fragmentation of markets). This is easily seen from the scores on market depth, which shows only seven countries above average.

Africa does not need 30 stock exchanges when half of these have equity market turnover of less than 10 percent of market capitalisation (and 10 with less than 10 percent turnover rates of outstanding bonds).

Nonetheless, it’s worth noting that several exchanges are moving the consolidation way. In West Africa, the BRVM is the regional stock exchange representing eight member states of the West African Economic and Monetary Union. Further, Ghana, Nigeria, Siera Leaone, Cape Verde and the BRVM could soon become a single exchange.

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This would allow brokers from each country to trade directly on each other’s exchange. Recent merger by Cameroon’s Doula Stock Exchange with Bourse des Valeurs Mobileres de l’Afrique Centrale (BVMAC), will create a unified regional exchange in Central Africa, which sets the stage for a deeper single market. East African Exchanges can follow a similar pathway.

Two, Africa needs to embrace alternative asset classes. Aversion to alternatives (read private equity, real estate investment trusts and hedge funds) is exposing mostly pension funds to enormous risks and meager returns.

Kenya makes a good example. Whilst provisions allow pension funds to allocate as much as 10 percent of their Sh112 billion investment book into private equity, current allocations stand at a lowly one percent.

Plain-vanilla government securities account for 39 percent of Kenya’s pension assets, followed by real estate at 20 percent and equities at 19 percent. Pension funds (and other institutional investors) need to understand their long investment horizon allow them to move away from government securities, listed equities and cash towards more alternatives. Besides, increased options provide portfolio diversification.

Three, Africa needs to stop relying on external markets for its financial needs. Projects such as the Companies to Inspire Africa 2018 are essentially meant to “kill” local markets as they are built to woo our best to list on foreign markets.

Lest we forget, the biggest “African” stock exchange (outside of South Africa) sits in London, where over 100 African companies are listed with a collective valuation of over Sh150 trillion.

With outside markets, Africa would always remain vulnerable to foreign investor whims. Whenever a less favourable credit rating is issued, international investors are quick to lose interest, yields shoot up and all of a sudden, we are a pariah.

Africa can follow Ghana’s example, which is trying to reduce foreign investment in its government bonds with a hard cap. The idea is to cut external vulnerabilities.

There’s so much to digest from the report. My final summation is that it’s time for African capital market to make the huge leap forward.

Mr Mwanyasi is managing director at Canaan Capital Limited.

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