Markets should better represent Africa’s economic potential

Many African stock markets are still too small. As a result, the continent’s economy lacks the proper leverage to accelerate economic growth. One way of remedying this situation is more targeted state promotion of those markets.

Capital News Africa: From the Trading Floor – Week #2-2022

Among Africa’s ten biggest publicly-traded companies are seven that are listed on Johannesburg Stock Exchange alone. The biggest of this group is the media and internet company Naspers with a market cap of EUR 53.3 billion. South African mining firm Anglo American Platinum is in second place with a market cap of EUR 26.2 billion.

Only when we reach eighth place do we encounter a company not based in South Africa, namely Kenyan telecoms operator Safaricom, which is valued at EUR 11.8 billion. Safaricom is closely followed by Moroccan peer Itissalat (Maroc Télécom), which is in ninth-place with a market cap of EUR 11.7 billion.

And although Nigeria has the biggest economy of any African nation, the biggest company of the country, cement maker Dangote Cement, occupies 12th place in Africa with a market cap of around EUR 9.4 billion.

A leading stock exchange

Johannesburg is host to Africa’s biggest companies as per market cap. But when compared to international exchanges, it occupies the 19th spot with a total market cap of EUR 980 billion. Johannesburg’s exchange is slightly behind those in Australia (EUR 1.7 trillion) and in Taiwan (EUR 1.6 trillion).

Meanwhile, African exchanges are far behind Johannesburg in terms of size. The Bourse de Casablanca reached a market cap of EUR 64 billion in October 2021, while the market caps of the Nigerian Stock Exchange and the Nairobi bourse hit EUR 43 billion and EUR 20 billion, respectively, during 2021.

Less worth than Adidas

To put the size of the three later African exchanges in perspective: With a combined market cap of EUR 43 billion, Nigerian stocks are valued less than German sporting goods firm Adidas, which has a market cap of EUR 50 billion.

Moreover, all stocks traded on Nairobi’s exchange are worth just over half as much as French dairy conglomerate Danone, which boasts a market cap of EUR 38 billion.

Although these figures may depress some readers, not all is lost. The small size of several African exchanges is simply a result of decades of neglect. But this can be overcome with the proper political will and by more cooperation between African exchanges.

The potential of Africa’s economy

What we find more problematic are the imbalances on African exchanges. For big oil companies, telecom operators and banks dominate those markets. For example, Safaricom, with a market cap of EUR 11.8 billion, accounts for almost 60% of the market cap of all stocks traded in Nairobi. In Johannesburg, mining companies and banks dominate.

We therefore find that the markets are not really representing the potential of Africa’s economy. There are too few fintechs and other tech start-ups listed on the exchange as well as too few consumer goods companies. In every African country one can find big well-run companies that, in our view, should seek an IPO. But their owners continue to ignore the opportunities that a stock exchange can provide.

Attract African savings

McKinsey, the international consulting group, discovered in a survey published in 2018 that there were not less than 438 businesses in Africa with USD 1 billion of annual sales. 50% of these companies have a local origin, but only 40% are publicly listed. And there are still many state-owned enterprises in Africa that should go public.

Instead, many of startup entrepreneurs in Africa decide to sell all or parts of their businesses directly to international financiers. We regard this as a mistake, as it robs African companies of their independence and bars Africans from investing their savings in the local economy. This holds down further development of Africa’s capital markets and the level of investment and economic growth that would result from such development. We would therefore like to again urge more targeted state support of those markets - as is, for example, on display in Morocco.