Are international investors paying enough attention to African securities markets?
It’s always important to remember when you look at Africa, that it is really a 54-market continent, and each one has different risk factors and potential.
But the fundamentals point to growth in Sub-Saharan Africa of 5.5-6% this year.
And, some commodity markets are starting to recover so there could be sizable growth.
Developed market growth is probably somewhere in the region of 2%, so it’s a great opportunity.
The main factor is demographic change.
By 2050 Africa will have more than a billion people in its working population, between the ages of 19 and 55, and by then China and possibly India will have started to have declining numbers.
Africa is a great story, with untapped opportunities in addition to those in commodities.
How investable is the growth story?
Of course, markets need to be ready for investment and there have been many developments since 2005.
New exchanges are going up – a new one started operating in Uganda in July 2016, Angola is looking to set up an exchange, Mozambique will also create one in the near future and in South Africa two more exchange licences were granted.
CSDs have upgraded their systems across Africa – whether Kenya, Nigeria and Ghana – and there are now two CSDs in South Africa.
A lot of governments are also looking at their securities regulations.
The market development is really fast and the infrastructure to support capital market growth will all soon be in place.
How do you anticipate the securities market development playing out?
Our view is that growth will come from the domestic institutional investor.
You’ll find that only about 10% of the adult population in Sub-Saharan Africa has got a pension in one form or another, and that is very low in terms of where we want to be.
Pension reforms are starting to drive more products in the markets. In Nigeria, less than 5% of people have any type of insurance.
As these numbers increase, the resulting institutional investment will drive further demand for assets and growth in asset prices.
The challenge in Sub-Saharan Africa, excluding-South Africa, is access to assets and liquidity. South Africa is very mature, so you have to strip it out to get the right picture. Assets are few and far between and investors buy-and-hold so liquidity is limited.
But as private equity investments become bigger some of those should convert to tradable assets.
That will create liquidity. Investment will come through these pension reforms.
How can asset managers engage in the market?
Most foreign portfolios come into Africa today through global custodians, but as more investment is allocated into Africa, certain investment funds might look for direct relationships.
For example, I met an asset manager in New York with $500bn AuM but his allocation to Africa was very was small.
They wanted greater exposure but they were removed from the market.
The first step was for their analyst get closer to the market – and that’s where we’ll facilitate engagement and support our client partners.
Only once the allocation increases that drives more appetite for Africa broader product financial product sets come into play.
What investment opportunities are there?
At the moment there are a lot of private equity investments. I see it like incubation, getting these industries up and running.
However, as these investments mature and scale grows a lot of them will come to market.
Also, a lot of infrastructure assets are still government- owned, which made a lot of sense, but as demand for these assets expands coupled with an enhanced need for capital funded expansion, some of them will also come to market.
There’s a lot of good companies in Africa starting to build and develop their industries – a lot of these companies will list in their local markets.
PricewaterhouseCoopers stated in a report that by 2020 global investable assets will be about $101trn and 12 markets in Africa is expected to register a compound annual growth rate of nearly 9.6%, rising to $1.98trn by 2020, from a 2008 total of $293bn.
This means huge demand for assets – and that will stimulate a lot of the growth in these markets.
In East Africa, there is a lot of inter-Africa trade starting to develop.
Around two years ago, limitations on what could be invested abroad were loosened.
Trading regions are being set up in East and West Africa. Markets are developing quickly to move towards global best practice in 10 to 15 years there’s going to be a very different landscape in Africa.
The other thing is technology, especially in Kenya. They’ve leapfrogged traditional banking by going straight to mobile banking.
These markets are ripe for financial market infrastructure disruption, from blockchain to fintech opportunities.
Some of these markets are not even SWIFT-enabled so it’s easier for them to grab new technologies and leapfrog legacy growth.
What new investment tools will be available in the near future?
In Kenya there are specific plans for rolling out new pieces of investment infrastructure.
At the end of last year, new regulations came out for securities lending and derivatives markets.
We’ve been granted a licence there and we’re working closely with the central bank and the CMA to set up the derivatives market, which hopefully will launch this year.
Nigeria is talking to us about a derivatives market, and we’ve created a business there for securities lending.
Swaziland and Botswana are also looking to set up similar markets. These products add liquidity to the markets and further expands access to exposure.
Is Africa becoming increasingly connected with international financial flows?
African governments have realised the importance of being part of the global community.
As the world evolves, as trade corridors break down, you need to create that integration.
Securities regulation is an example of how things are changing to align with global best practice – look at how the securities exchanges are aligning to IOSCO’s principles.
The China – Africa corridor is key for Africa, with large Chinese investment.
Access to commodities remains important, and the relationship with Africa 100% makes sense.
The IMF has also played a key role in Africa – with funding lines, supporting the policy setting and providing advisory work to help markets realise their potential.
There’s been a big culture change, even in the past five years relative to the previous 25 years.
How much potential does the continent have?
If you look around the world, Africa is really the untapped continent.
To be part of this journey, to support the regulators and to see them evolve and grow, is a great opportunity and privilege for us.
The regulators want markets to grow, they see the potential.
Once the regulators all align, it will create a massive opportunity for the whole market.
Despite the challenges, Africa is still going to be very interesting.
Nigeria has had a tough trading environment over the past two or three years but that hasn’t stopped it building out its financial market infrastructure – moving from physical to electronic, launching securities lending and starting up a derivative exchange.
They might have some challenges coming their way with commodity shocks or slowdowns in key markets that impact them, but it doesn’t deter them from getting ready for the longer term, and that’s a massive positive.
There has been rapid development from the financial market infrastructure perspective on the continent to facilitate and support its growth.
As I mentioned, it’s a market where just 10% of the adult population has a pension and 5% have insurance.
Pension reform is happening in these markets and this will drive the investment landscape.
And then you find an ageing global investor base looking for opportunity and yield. If you bring those two things together it makes for a great story from a capital market perspective. It’s in its infancy but we are already seeing the story play out.