African Stock Exchanges: Winners and Losers

To better understand Africa’s financial landscape, this brief highlights the winners and losers of the stock exchanges in regards to ease of doing business within a prospective country, GDP growth, exchange rate fluctuations, size and governance. The analysis spotlights the unique risks and rewards for investors choosing companies listed on sub-Saharan exchanges and compares them to the companies traded on BRIC nation stock exchanges (Brazil, Russia, India, China).

According to the U.S. Securities and Exchange Commission, there are two primary motivations for U.S. investors (or any domestic investor) to invest abroad, the first is diversification of risk and the second is to take advantage of potential growth. However there are some unique risks when investing abroad. These include:

  • Change in Currency Exchange Rates
  • Political, Economic and Social Events
  • Less Information Available
  • Different Market Operations
  • Reliance on Foreign Legal Remedies
  • Lack of Liquidity
  • Dramatic Changes in Market Value

Currency Exchange Rates: Currency exchange rates are crucial when making an investment in foreign markets. Most foreign exchanges require payments and payouts in the local currency. If the local currency devalues the payout to the investor can be lower than the initial investment due to devaluation. As an example, let’s say you invest 100USD into country B. Country B’s exchange rate is 1USD to 1Unit. Let’s say that you buy 100 shares at 1Unit a piece. Let us now say that two years down the road you decide to sell your shares. The shares are still worth 1Unit per share but the exchange rate between the USD and the Unit is now 1USD to 2Units, meaning the Unit has depreciated. A return for the investor would still be 100Units but after conversion into USD you will be left with only $50USD. These fluctuations are not unknown across borders with some countries experiencing greater fluctuations than others.

The winner for minimizing exchange rate fluctuations within sub-Saharan Africa would most likely be South Africa’s Johannesburg Stock Exchange. On July 24, 2012 the JSE announced Quanto Futures. According to the press statement, “a Quanto Future is a Rand denominated commodity investment product that delivers the same payoff as a pure dollar denominated commodity investment, allowing investors immunity from exchange rate fluctuations between the rand and dollar.”[1] In other words, if the price of a commodity increases by 20% in US Dollar terms, then the value of the investor’s Rand position will also increase by 20%. The movement of the Rand relative to the US Dollar plays no part in determining an investor’s return.

Other countries that have had appreciating or more stable exchange rates in comparison with the United States over the past decade are Mauritius, the BVRM and the Rand Based exchanges of Namibia and Swaziland. In the past decade the Mauritian Rupee, the BVRM’s West African CFA Franc as well as the Namibian Dollar and Swazi Lilangeni (both pegged to the South African Rand) have seen their currency appreciate to the US dollar the past 10 years. The chart below shows the biggest winners and losers and how they compared to the BRICs over the past ten years.

However taking the values of appreciation and depreciation from the past five years show us a bit different view of the currencies within Africa and the BRICs.

Political, Economic and Social Events/Reliance on Foreign Legal Remedies: Some of the most important investor flags are political, economic and social events. Today information is at almost anyone’s reach whether online, in the news or through social media. Countless statistics have been created to measure variables such as capital flight, good governance as well as political and economic freedoms. A proxy that can be used for economic and political events influencing stocks is the Ease of Doing Business Index that was compiled by the World Bank. The Ease of Doing Business Index is Economies are ranked on their ease of doing business, from 1 – 183. A high ranking on the ease of doing business index means the regulatory environment is more conducive to the starting and operation of a local firm. This index averages the country’s percentile rankings on 10 topics, made up of a variety of indicators, giving equal weight to each topic. The Ease of Doing Business Index not only measures variables like how long it takes to start up a company but also the rule of law and protection for business. The rankings for all economies are benchmarked to June 2011. The losers of the Ease of Doing Business Index were Zimbabwe along with the BRVM nations which scored at the bottom of the world and sub-Saharan indexes. The average of the 8 nations can be seen below.[2]

Two subcategories to the Ease of Doing Business Report prove to be extremely relevant in our dealings with investment in Africa, protecting investors and enforcing contracts.

The Ibrahim Index of African Governance can also be used as a proxy to measure the political situation in sub-Saharan Africa. It is a composite index, constructed by combining underlying indicators in a standardized way to provide a statistical measure of governance performance in all African countries. The rating is from 1-100 with 100 being the best. Below the winners and losers can be seen from the 2010 index. Governance, as defined by the Board of the Mo Ibrahim Foundation, is inclusive from the viewpoint of the citizen. The definition is intentionally broad so as to capture all aspects of what a citizen has the right to demand from his or her state. It can be summarized by four over-arching dimensions: Safety and Rule of Law, Participation and Human Rights, Sustainable Economic Opportunity, and Human Development. It is important to note that since 2010 we can expect the BRVM average to have decreased further with political instability in the Ivory Coast and most recently, Mali.

Economic events can also affect investment. Further economic growth can attract investors to the possibility of huge returns. The following graph below shows the winners and losers of African GDP growth and compares them to the BRICS. To minimize these risks the World Bank has created the Multilateral Investment Guarantee Agency (MIGA) which offers coverage for five non-commercial risks. The coverage may be purchased individually or in combination protecting qualifying investors from currency inconvertibility and transfer restriction, expropriation, war, terrorism and civil disturbance, breach of contract or non-honoring of sovereign financial obligations. The types of foreign investments that can be covered include equity, shareholder loans, shareholder loan guaranties, and non-shareholder loans. All loans and loan guaranties, including those issued by shareholders of the project, must have a minimum maturity of more than one year provided that MIGA determines the project represents a long-term commitment by the investors. Other forms of investment, such as technical assistance and management contracts, asset securitizations, capital market bond issues, leasing, services, and franchising and licensing agreements, may also be eligible for coverage.

Lack of Liquidity:

As the U.S Securities and Exchanges Commission states, one of the risks of investing abroad is lack of liquidity. They describe a lack of liquidity as “Foreign markets may have lower trading volumes and fewer listed companies.  They may only be open a few hours a day. Some countries restrict the amount or type of stocks that foreign investors may purchase. You may have to pay premium prices to buy a foreign security and have difficulty finding a buyer when you want to sell.” Some African exchanges are very illiquid in the sense of limited trading volumes as well as total companies listed. Rwanda and Swaziland for example have 3 and 6 companies listed on their exchanges. South Africa, however, has 406 a number that beats out Russia’s MICEX (284) and comes close to Brazil’s BM&F Bovespa (470). Coming in second is the Nigerian Stock Exchange with a total of 198 listed companies. Nigeria’s volume traded amounted to 89,576,608,901 in 2011. The Johannesburg Securities Exchange saw a volume traded that was equal to 71,463,833,873. During the same time-period, the BRVM had a volume traded of only 19,799,503.


[2] Full tables can be seen at the end of this paper.