On the Market Frontier - Luring investors to African stocks
Two Black-owned companies are turning the global spotlight on African capital markets. Emerging Africa Ltd., a New York firm that publishes daily information via Bloom-berg on companies listed on Africa’s 16 stock exchanges, and Nex-Rubica Analytics Ltd., an Africa-focused ratings and market data group in London, created an index series that tracks 40 companies from five of Africa’s most liquid and active stock markets: Egypt, Kenya, Mauritius, Morocco, and Nigeria. The series will provide market risk, historic and reference data on each company, tailored for use by institutional investors, hedge fund managers and other big investors seeking a representative benchmark of African markets and shares that they can buy or sell individually, or in a basket.
African-American investment clubs now have an opportunity to get into the act. “The over-achieving yet undervalued publicly traded companies of Africa are waiting to be discovered by U.S. and global investors,” says Thomas Mims, Emerging Africa’s founder and managing partner.
Mims is a former stockbroker who has been a financial consultant in Africa for the last 25 years. He is well known by the heads of the continent’s stock exchanges. He worries that African-Americans are not considering Africa’s capital markets, when those markets are poised for a high rate of expansion. “The most disappointing thing is we have tons of young Africans and African-Americans who are in very important positions on Wall Street and they don’t apply this to Africa. It’s regressive,” he laments.
There are a few exceptions, of course, like the partners at Monolith Investment Management L.L.C., who are preparing to launch an Africa infrastructure fund.
Wall Streeters counter that without access to reliable data, they have no choice but to steer clear of African stocks. “Right now you can’t call any broker and buy African stocks if you want to,” Mims says. Largely for this reason, Africa receives only about five percent of the foreign portfolio investment going into developing countries, although, excluding South Africa, it out-performed the rest of the world’s stock markets and Morgan Stanley’s world and emerging markets index, in 2005. African markets also have not lured the so-called hot money, or highly volatile short-term funds, because many of the stocks are in the hands of institutions that follow a buy-and-hold strategy.
“While such investors offer some stability to share prices, the down side is that the long-term view that forms this type of investor’s decisions has exacerbated already low levels of liquidity. The extremely low liquidity levels of African stock exchanges are often cited as the major barrier to expansion,” Mims says. A whopping 60 percent of the African stock exchanges have an annual turnover ratio of less than 10 percent. While Africa trades five billion shares a year, the New York Stock Exchange and the Nasdaq together sometimes trade that many shares in one day.
Luring investors to Africa, then, requires providing access to data and to the shares themselves. “That’s why we built this index,” says Mims. “We’re creating a situation where those 40 stocks are in the spotlight now [when they have] never been before. All have a market value of $500 million at least. They are liquid and have good free float, which means they are not closely held with a small percent of shares trading. They overcome all the objections to investing in Africa,” he says.
Equally important, the index will lead to an exchange-traded fund, with all or some of the 40 companies in its pool of securities. That’s good news for small investors, since such funds typically issue shares in large blocks, which could be split up and sold as individual shares on a secondary market. Objections aside, capital flow into Africa is beginning to increase. China, which has gobbled up much of the U.S. paper, is leading the trend, followed by India, big U.S. and international banks and, more recently, a hedge fund, Mims says. U.S. university endowments are looking for ways to increase their tiny Africa portfolio, while other institutions are taking positions to counter China’s insatiable appetite. “Right now there is great pressure to countervail against China. A ton of money is going into Africa to be defensive,” Mims says.
The hope is that Wall Street Blacks will lead, not follow, on the Africa frontier. Flush with oil money, Nigeria has allocated $7 billion of its foreign reserves to be jointly managed by Nigerian banks and foreign fund managers. The list of fund managers chosen speaks volumes.
By Rosalind McLymont