Africa is a continent rich in mineral resources, agricultural potential and human capital. Particularly the latter should be an enticing fact to set off an investment boom.
According to a note published last year, the World Economic Forum indicated that by 2050, it is expected that two out of every five children born worldwide, will be in Africa. The continent is noticably somewhat of a last frontier for companies, ranging from consumer staples, finance, property and agriculture to mining and clean energy, for instance. Unfortunately, the last decade has proven the opposite, since illiquidity on the continent (excluding South Africa in this article) stands in the way of luring large money managers from the US, UK, Japan and Europe to snap up stocks.
This situation is evident by only three specialist SA funds focussing on African equities outside SA. Government is also keen for more SA retirement savings finding its way into stock markets on the rest of the continent. Regulation 28 of the Pension Funds Act stipulates that 25% of funds can be invested offshore, excluding Africa, and 5% in Africa. With a retirement savings pool of about R2.99tr at the end of September 2020, according to the central bank’s Quarterly Bulletin, the potential allocation to African equities, should pension fund trustees reckon it is a good investment, would be R149.4bn.
But this is not happening. “Africa ex-SA fund managers have become an endangered species with many funds closing in the past five years as global investors became disenchanted,” says Rory KutiskerJacobson, co-manager of the Allan Gray Africa ex-SA Equity Fund, with $419m under its management at the end of March. “The redemption and withdrawal of these funds have further exacerbated the liquidity issues in Africa ex-SA, and as in many shares, there is a dearth of buyers and a long list of sellers.”
Godfrey Mwanza, head of Absa’s Africa equity franchise at Absa Asset Management, and manager of the Absa Africa Equity Feeder Fund, says that high interest rates, lack of product innovation and fixed exchange rates are the main reasons for low liquidity on African bourses ex-SA, particularly in SubSaharan Africa (see table 1 for an overview).
“Nigeria, for example, has close to $30bn in pension assets and is growing,” Mwanza says. “However, the stock exchange trades $10m on a good day. This is because, historically, interest rates have been so high that being in fixed income rather than stocks has made more sense.”
When interest rates fall, he says, pension funds’ participation liquidity in the stock market increases. “Across the continent, fixed-income markets are more liquid than their equity counterparts.”
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