Investing Outside the Box: The vibrancy of Africa?s stock exchanges

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Financial strategists rarely, if ever, mention the performance of African bourses when pitching securities markets as a vehicle for generating wealth. Absence of the Africa option in proffered wealth-generation strategies shortchanges Blacks in the Diaspora, particularly in the United States, where Blacks have become more active stock market investors over the last half-decade or so.

The Corporate Council on Africa?the Washington, D.C., organization of U.S. corporations that collectively accounts for about 85 percent of total U.S. private investment in Africa?has a great deal to say about the African exchanges. And well it should. Its members, after all, are the companies that earn billions of dollars a year by acting on the knowledge that the world not only extends beyond U.S. borders but also often offers lucrative business opportunities in markets deemed ?high risk? or ?unattractive.?

In 2003, the council tells us, Africa was home to the world?s best-performing stock market?the Ghana Bourse. With a U.S. dollar return of 144 percent, Ghana?s exchange outpaced 61 markets around the world surveyed by Databank Financial Services Ltd. Uganda, Kenya, Egypt, Nigeria and Mauritius were other strong performers in Africa, with returns in U.S. dollar terms exceeding 50 percent in 2003.

According to Databank, average returns on African stocks last year reached 44 percent. Compare that figure with a 30 percent return by the MSCI (Morgan Stanley Capital International) global index; 32 percent in Europe; 26 percent in the U.S. (Standard & Poor?s); and 36 percent in Japan (Nikkei). In both 2002 and 2003, the Ghana Bourse led the world with a compounded index return in U.S. dollar terms of 256 percent. Impressive corporate results, cheap valuations and an improving macroeconomic environment drove Ghana?s bull market, the survey says. In 2003, Standard and Poor?s upgraded Ghana?s sovereign credit rating to B+.

Databank also found that Kenyan stocks attracted new attention because of the country?s successful political transition, commitment to macroeconomic reforms, government steps to tackle corruption and the resumption of foreign aid. Bullish crude oil prices, exchange and interest rate stability and cheap valuations also lifted Nigerian stocks.

There?s a great deal more going on in the continent?s capital markets that would be of interest to those who are open to investing outside the box. In June, South Africa?s JSE Securities Exchange SA (JSE) announced plans to launch an Africa-wide board alongside AltX, the new alternative exchange in South Africa for smaller firms, and its main board this year. South Africa currently dominates equities trading on the continent, accounting for 99 percent of trade. The plan, says JSE CEO Russell Loubser, is to bring Zimbabwe and Zambia into the JSE?s existing trading system, joining Namibia, which already uses it. ?Every country [that joins this platform] will still have their own exchange, but they will also get the benefit of a regional exchange,? Loubser notes. Responding to concerns about Zimbabwe?s weak economy, he points out that the country?s financial market stocks are still in good health. ?The Zimbabwean exchange does 150 to 200 trades a day, which is good for a small market. It deserves our help,? he says.

Some see the planned board as the first step toward the much talked about Pan-Africa exchange. Ghana is already looking at joining this platform. With international investors not exactly flocking to African stock markets, the new board could be a major draw. Business Day, a leading financial newspaper in South Africa, notes that once in place, the board not only will expose African companies to a greater pool of international investors, but it also will give participating countries a far more reliable environment in which to trade their shares.

In another capital markets move, the JSE signed a memorandum of understanding with the National African Federated Chamber of Commerce (Nafcoc) to help boost the Black presence on AltX. The South African government is leading an aggressive campaign of Black empowerment, and the white-dominated establishments that control much of the economy appear to be heeding the call. According to a 2004 Empowerment Report by local consultants BusinessMap, Black equity in the stock exchange is just 3 percent of total market capitalization. In the JSE-Nafcoc partnership, the JSE would introduce training and education programs on such topics as listing requirements and share ownership. Nafcoc CEO Sipho Mseleku adds that every company that lists on AltX would be encouraged to seek an empowerment partner. Nafcoc, with its large base of Black-owned enterprises, would assist companies looking for empowerment partners.