BY Kate Douglas | 19 November 2013
African stock markets have, in some ways, come a long way in the last five years. According to Nerina Visser, head of Beta and ETFs at Nedbank Capital, it was not that long ago that the only way to receive information about trading activity in some of these stock markets was by fax or email.
Fast forward five years and these African markets are now electronic. “When I say electronic, that doesn’t mean that they necessarily have an automated trading system in place but at least they are connected in an electronic way where they can capture their trading activity and [convey] that information to the bigger world electronically which I think is already a big improvement in terms of accessibility to those markets,” Visser told How we made it in Africa.
“Because really your first step always is about research; about understanding what the investment opportunity is all about. And if one cannot get that information electronically it makes it extremely difficult to really assess that opportunity properly.”
Other markets have adopted an automated trading system, such as Botswana a year ago. Not only has the Botswana Stock Exchange gradually extended its daily trading hours, but according to Visser, it has seen a significant increase in trading volumes since implementing the automated trading system.
Botswana Stock Exchange (Photo credit: Wikipedia)
However, despite these improvements in African stock exchanges in recent years, the question remains: why haven’t more local companies listed on African stock markets?
What are the deterrents for companies?
“I think there are a couple of aspects to this,” said Visser. “Obviously with the lack of liquidity and trading activity that we used to have, and still have to some extent, for many companies that is a deterrent. What is the value-add for a company to go list in a particular market if there are such low levels of liquidity? Because if you think about it, the role of the stock exchange or a market like that is essentially a place to raise capital for a company. But if there are such limited opportunities available for trading, the companies don’t see that as a viable capital raising place – especially when it comes to, for example, the mining companies. The amount of capital and especially the riskiness of the capital that they are looking to raise from a market is often not really available in many of your African markets because these exchanges and the market’s [participants] often don’t necessarily understand what mining activity really entails.”
Visser said this is why African mining companies often list on global exchanges such as in London or the Johannesburg Stock Exchange (JSE). “Because those are markets that traditionally have got a big resource or commodity base anyway, so you have got market participants that actually understand resources, understand mining, know how to value it, know how to trade in it, how to raise capital and so on,” she explained. “That’s been one of the biggest impediments to attracting especially African mining companies to list on the stock exchanges in Africa.”
The Johannesburg Stock Exchange building. (Photo credit: Wikipedia)
In terms of large, African companies, many of those that list on their local African stock exchanges find their listed shares are tightly held by typically the large pension funds in a country.
“There are some huge companies, great multinational companies operating [in Africa] but the shares are just not freely available because they are essentially all held by the government pension funds,” continued Visser. “Even when you get the listings then you don’t get the secondary market liquidity because those shares are typically invested in and then held almost [perpetually] and basically they just receive the dividends that are paid out from those investments.”
Another deterrent for companies is the stock exchange listing fees, alongside other costs such as legal fees and the cost of making company trading information accessible to shareholders.
“So let’s take a company that is operating in several African countries, if one would want them to be listed in all of the countries in which they operate you are expecting that company to not only go and incur multiple listing fees, but also this cost of being listed, of engaging with the market in multiple jurisdictions,” explained Visser. “And that is where the companies sort of stop and ask ‘why do we want to incur these extra costs if we don’t really see this as a viable capital raising market for us?’ It then becomes so much easier for them to then go and list in a market which they know they can easily interact with, they can get lots of liquidity, lots of capital and so on.”
What should African stock exchanges be doing?
Visser suggested that African stock markets should firstly make listing on them as easy as possible. The Stock Exchange of Mauritius is a good example of this.
“They have worked very closely with the regulator in their own market – whether that is the financial market regulator or whether it is the Ministry of Finance or whether it is the central bank – they engage directly with those regulators to make sure that the regulations that are put in place make it as transparent, simple, straightforward and easy as possible for companies to go and invest in Mauritius or to be invested on the Mauritius stock exchange. That level of interaction is certainly something that can go a long way towards facilitating additional listings in a market,” she continued.
“But often it’s not even your laws or your regulations… If you look at things like what your pension funds are allowed to invest in, in many of these markets the majority of their investments are still represented by bonds; a lot of them don’t actually allow for a lot of equity investments by their pension funds. So to expect a company to go and list on a stock exchange but then the pension funds of [their] own market are not allowed to really invest in a lot of the shares, means you are sort of placing a natural limit on the amount of investment that can be raised by equity capital markets. And it’s those sorts of regulations that all need to be addressed almost proactively by all the role-players in a particular market… of which the stock exchange is really just one.”
Visser added that the Stock Exchange of Mauritius has done well in terms of creating a feasible environment in which companies can list. “It’s wonderful to see the market in which they have been able to do it so successfully, you know Mauritius definitely comes to mind. I know that they specifically would like to position themselves as the gateway to Africa in terms of financial markets,” she continued.
“When I look at Botswana to see also the extent to which they facilitate amongst the specific regulators [and] all the involved parties really, to improve just the working of the market, what is necessary, what needs to be done… [that] speaks to a stock exchange that is proactive enough to engage pre-emptively, almost helping to make these things happen and that is really what is necessary.”
Sourced here: http://www.howwemadeitinafrica.com/how-can-african-stock-exchanges-encourage-more-listings/32583/?fullpost=1
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