Africa’s capital markets are still too dependent on foreign investors. However, that is changing as several governments seek to encourage domestic investment. In the effort, African asset management is poised to be one of the biggest growth industries of the future.
Capital News Africa: From the Trading Floor – Week 35-2022
The Covid-19 pandemic showed Africa how economically dangerous it is to be too dependent on foreign investors. Consider that during the pandemic, foreign investors left the Nairobi Securities Exchange (NSE) in droves, causing potential problems for the liquidity of the stocks traded on the NSE.
The African Securities Exchanges Association (ASEA) says in a report that while foreign investors accounted for 75% of daily trading volume in September 2020, that number dropped to less than half by August 2021. This is even more jarring if one considers that in past years, this investor block accounted for 90% of the daily trading on the NSE.
Up until the pandemic, African capital markets endeavoured to attract a huge number of foreign investors. This was the right move, as such investors helped to make those markets more professional and liquid. And in doing so, they helped listed African companies adopt international governance and transparency standards.
Yet following the foreign investor exodus during Covid, African politicians concerned about their capital markets have moved to attracting more domestic investment. The ASEA observes in the report: “To moderate this effect (high fluctuations of foreign investments on African stock exchanges), exchanges have also made efforts to increase the participation of domestic institutional investors – particularly pension funds.”
Our own view is that the politicians should continue to make their markets attractive to international investors as well as getting more domestic ones enthusiastic about them.
In this effort, supporting domestic asset managers, life insurers and pension funds will be key. But this will likely happen anyway as private and corporate pensions in Africa gain importance in retirement provisioning. State pensions are often too low and not paid out on a regular basis. The consequence: Older people in Africa become dependent on the younger generations. Such a dependency is too much for many families.
Indeed, due to the shift to more private pensions, asset management in Africa should become one of the continent’s biggest growth industries. “In the next decade we will see the emergence of the ‘Blackstones’ and ‘Blackrocks’ of Africa, hopefully adjusted to local realities and needs,” Nimrod Gerber, managing partner at Vital Capital, an asset manager focused on Africa, wrote in a recent column. Several big asset managers have already emerged. These include Northstar Asset Management, Allan Gray, Ninety One and Coronation in South Africa; EFG Hermes in Egypt; and First City Monument Bank in Nigeria.
Meanwhile, a study by the business consultancy PwC says that the assets under management (AuM) for Africa and the Middle East will increase to USD 1.6 trillion in 2025 from USD 1 trillion in 2020. This reflects annual growth of 9.5% for the period. PwC did not disclose an AuM figure for Africa alone.
Along with equity and bond funds, pension funds in Africa should become much more important. According to the ASEA study, pension assets already account for 12% of GDP in Kenya, while in South Africa they make up a whopping 57% of GDP. In other bigger African economies like Nigeria and Ghana, the ratio of pension assets to GDP is much lower, at 7% and 4%, respectively.
All told, Africa-based pension funds are estimated to have a total AuM of USD 700 billion (EUR 703 billion). There are also sovereign wealth funds in Africa whose AuM, according to ASEA, could rise to USD 1 trillion in 2030 from USD 16 billion currently.
Such big African institutions tend to favour international securities over domestic ones. Mindful of this, regulators in Uganda, Kenya, Morocco and Ghana are currently making it easier for pension funds to invest in their domestic capital markets. In this regard, South Africa is much farther along. In that country, the Public Investment Corporation accounts for 12.5% of the total market cap for the Johannesburg Stock Exchange (JSE).
We wish those regulators lots of success. Should they manage to attract more institutional investment for African stock and bonds markets, this would lead to a huge amount of fresh capital for the economy overall.
Given that scenario, more African companies would venture an IPO and African governments would find privatisation of state-owned firms more attractive. Moreover, listed African companies could then finance further growth with more local capital. The financing needs associated with new infrastructure could also be met with more African capital.
A stock exchange listing works like a turbocharger: It makes good companies better and raises their profile internationally due to the heightened transparency and visibility. A listing also makes companies more credible.