Mining for liquidity in Africa’s stock exchanges

Improvements in political and macroeconomic stability, policy certainty and legal systems in many African countries, as well as Africa’s growing middle class and rise in consumption, continue to raise the bar on foreign interest in Africa as an investment destination – as GDP growth (as a whole) averages at six percent for three consecutive years*. Yet, Africa hasn’t reached its potential share of investment in extractive service.

In fact, the UNCTAD has revealed that although the share of the extractive industry in the cumulative value of announced cross-border Greenfield Investment projects is still significant for Africa – at twenty six percent – the extractive industries share of the total number of projects has dropped to eight percent.

According to Robbie Cheadle, Associate Director: Mergers and Acquisitions Advisory Services, KPMG in South Africa: “This is in line with a world-wide reduction in investments into the extractive industries. Despite the rosy picture that is repeatedly painted of foreign interest and investments in Africa, investors often still have many unanswered questions when looking to invest in Africa’s extractive industries, which are often flagged as having higher risks potential relating to policy uncertainty or market instability.”

For instance, where an increase in foreign direct investment (FDI) inflows should naturally lead to an increase in listings, in Africa currently this isn’t the case. “An analysis of the number of listed companies between 2010 and June 2014 across various Africa-based stock exchanges indicated that the number of listed companies on these exchanges has either remained static or increased marginally and, in some cases have declined slightly despite strong growth in the total market capitalisation of most of these stock exchanges,” add Cheadle.

Added to this, generally African stock exchanges lack liquidity, which may be due to a number of factors, including; the limited number of listed companies on the stock exchanges, the limited free float, the low numbers of retail investors, the significant and long-term holdings by pension funds and the high transaction costs. Furthermore, prospective foreign investors also have difficulty in finding a counterpart who is willing to sell their shares – and it is difficult for prospective institutional investors to secure large enough quantities of the target securities to meet their investment criteria.

However, Cheadle believes that deepening the African markets through attracting more listings to the various bourses will go a long way to solving the illiquidity of the various African exchanges. In a new publication, entitledListing in the Africa Extractive Industries, KPMG indicates that this may be achieved through any of four approaches, including;

• Incentivising large foreign listed multinationals to list on local stock exchanges,
• Incentivising large local listed multinationals to list on local stock exchanges in jurisdictions that they expand into
• Attracting more private equity investment into Africa and encouraging such private equity players to consider a local listing as an “exit” option in the future, and
• Encouraging small to medium sized local companies to list on the junior markets of the local stock exchanges.

“While growing local stock exchanges and improving liquidity on these will go a long way in continuing to attract foreign investors to Africa, it should also be noted that currently FDI inflows to Africa are being sustained by increasing intra-African investments – mainly in the manufacturing and services industries – where these are being led by South African, Kenyan and Nigerian transnational corporations. And it’s not only great to see that Africa is investing in itself, but there are lessons that can be learnt and shared from existing successful intra-regional investments or projects and, that will see Africa better placed to take advantage of the next commodities super cycle,” concludes Cheadle.

The Listing in the Africa Extractive Industries is a supplement to the existing Listing in Africa publication, in which KPMG has attempted to answer critical questions and provide potential investors who have an interest in extractive industries with some further insights into how significant the extractive industries are in Africa. The publication addresses the equity market capitalisation and liquidity of the various African stock exchanges; how the various African countries rank in comparison with their international peers across various rating criteria – particularly in policy and political uncertainty – and the fiscal policies applicable to the extractive industries. The publication also provides insights on specific listing criteria and continuing obligations for Mineral Companies either applying for a listing or already listed on the various African stock exchanges.

For more please download Listing in Africa Report.

Source: KPMG, Africa.