The role of stock exchanges in growing the African financial markets
Robbie Cheadle, Associate Director, Deal Advisory
“STOCK EXCHANGES PLAY A VITAL AND VARIED ROLE IN THE DEVELOPMENT OF THE ECONOMY OF A COUNTRY.”
Some of the most important areas of economic development that stock exchanges play a significant role in are as follows:
- Enabling companies to raise equity capital to fund growth requirements, existing projects and acquisition opportunities and/or reduce current gearing levels in the company;
- Providing companies with a currency, in the form of listed shares, that they can utilise to make acquisitions;
- Facilitating investment by the public into fast growing and high yielding economic sectors while offering investor protections via formal oversight and regulation of investments;
- Enabling small investors to participate in the growth and future wealth of profitable companies; and
- Providing governments with a platform to raise debt funding for developmental projects through the issue of bonds.
The bond and equity markets in Africa are still relatively underdeveloped in comparison to their European, American, Asian and Australian counterparts. Based on statistics provided by African Securities Exchanges Association (“ASEA”), the combined value of all of the equity securities traded in respect of the 21 ASEA member stock exchanges that were reviewed by KPMG (“Reviewed ASEA Members”) during 2013 amounted to US$454 974.4 million of which US$41 920.50 million related to all of the ASEA member stock exchanges excluding the JSE Limited (“JSE”). The Reviewed ASEA Members with the next highest traded values of equity securities were the Egyptian Stock Exchange (“EGX”) and the Casablanca Stock Exchange (“CSE”), with total values of equity securities traded during 2013 of US$23 331.2 million and US$5 956.6 million, respectively. The total market capitalisation of the Reviewed ASEA Members was US$1 611.80 billion to which the JSE contributes US$1 102.3 billion. Excluding the JSE, the Namibian Stock Exchange has the highest market capitalisation, amounting to US$134.1 billion, followed by the Nigerian Stock Exchange, with a market capitalisation of US$80.7 billion. The total number of listed companies on the 21 ASEA member stock exchanges was 1 413 as at 31 December 2013.
Based on the ASEA statistics provided in the ASEA 2014 Yearbook, the combined value of all of the listed bonds traded in respect of the Reviewed ASEA Members during 2013 amounted to US$2 080.6 billion of which US$13 634.06 million related to all of the ASEA member stock exchanges excluding the JSE. The Nairobi Stock Exchange in Kenya registered trade amounting to US$5 261.2 million in respect of listed bonds in 2013, followed by the EGX with a traded bond value of US$4 149.4 million and the Lusaka Stock Exchange, with a traded bond value of US$2 465.0 million in 2013. It is noted that not all government bonds trade on the local African stock exchanges.
The African stock exchanges have amongst the lowest liquidities in the world with only EGX, the JSE and the Khartoum Stock Exchange in Sudan, achieving anywhere close to average global liquidity, with liquidities (calculated as total values of equity securities traded during the year ended 31 December 2013 divided by the total market capitalisation of the stock exchange on 31 December 2013) of 37.9%, 37.5% and 32.5%, respectively.
The lack of liquidity on the African stock exchanges is due to a number of factors including the limited number of listed companies on the stock exchanges, the limited free float, the low numbers of retail investors, the significant and long-term holdings by pension funds and the high transaction costs. Prospective foreign investors have difficulty in finding a counterpart who is willing to sell their shares. In addition, it is difficult for prospective institutional investors to secure large enough quantities of the target securities to meet their investment criteria.