If you reckon that Africa is the next big investment thing, as many do, how would you “buy it”? The continent is made up of so many countries, all with their own stories, that it might represent a massive opportunity in terms of its demographics and resources but, in the main, it is a confusion of choices for many investors.
But a new index, announced this week at the African Stock Exchange Association’s (Asea’s) annual conference in Marrakech, Morocco, is intended to give investors a single entry point into the long, dark continent.
The FTSE-Asea Pan Africa index will allow investors to buy into the African growth story through the members of the stock exchange association. The index, which is expected to be operational by the middle of next year, is likely to attract investors looking for a simple way of exposing themselves to the African story.
A similar index in China, the FTSE-Xinhua, has attracted $14-billion in investment since it was established in 2000. South Africa will dominate the new index, making up about 65% of its weighting, nearly twice that of all the other African stock exchanges combined, as the JSE’s market capitalisation, at $580-billion, dwarfs those of the other association members. About 16 of the association’s 22 members will initially be included in the FTSE-Asea.
FTSE managing director Imogen Dillon Hatcher told delegates that investment flows to Africa had increased 500% between 2000 and 2010 to $122-billion a year, with the United States and Europe being the largest investors.
The FTSE-Asea index, she said, would help to “drive the story of Africa as an investable proposition”. Experience had shown that, over time, it was hard for fund managers to outperform an index, she said. A good index should be low-cost, market-based, transparent, rules-based and investable, meaning that the underlying shares were liquid. The weightings reflected the free floating of available shares.
The JSE’s executive director, Geoff Rothschild, who is also the association’s vice-president, said that, at first, the index would provide information rather than be tradeable.
Rothschild said that, when the JSE met offshore investors, they would often say that to trade in South Africa was great but they also wanted to “buy Africa”. It was critical, though, that the index be supported by good data and be accurate. “If you put rubbish in, you get rubbish out,” he said.
Two indexes
It was likely that there would be two indexes, one that would include South Africa and another that would exclude it, said Rothschild. An issue for African countries was to decide whether every country should have its own exchange. There were 22 exchanges but it was not clear that they all had a business case.
The Asea conference attracted 350 delegates representing the association’s exchanges, which operate in 27 countries. The panels included speakers from Turkey, Jordan, Tunisia, China, Egypt and France, Nigeria, Ghana, Morocco, Mauritius, Namibia and Gabon. The central message was that Africa was the world’s final growth frontier with 25% of the world’s economic resources. Growth in the Brics countries (Brazil, Russia, India, China, South Africa) was spurring demand for these resources.
But speakers also stressed that it was not only resources that were bringing investors to Africa. Resources counted for just 24% of growth between 2000 and 2007. Consumers across the continent were growing their buying power. Africa, just in population size, would become the world’s largest market in coming decades. Sunil Benimadhu, association president and chief executive of the Mauritius Stock Exchange, quoted a study of 950 companies in Africa that showed the return on capital as 11% higher than in Latin America and Asia, including China.
“Investors are being rewarded for the additional risks they are taking,” he said. “African stock markets have been the best performers in the world over the past 10 years.”
But there is also hard, practical realism. Fewer than 1% of Africans invest in their stock markets and a Rwandan delegate bemoaned the fact that he had to fly via Europe to get to the Asea conference as there was no direct air link.
One African exchange has only three members and only a handful issue bonds that investors can buy. Regional integration is often poor, as is regulation.
Vanessa Rossi, a United Kingdom-based economist, said 75% of world growth was coming from emerging markets, which were growing at between 6% and 7%, whereas developed markets averaged between 1% and 2%. Whatever happened in developed markets, she said, emerging markets had the potential to continue with high growth.
Sean Cleary, a South African strategist and author, said growth in sub-Saharan Africa averaged above 5% between 2000 and 2010, in three years during this period exceeding 7%. He said the average budget deficit for African countries was only 3.4%, with an average debt to gross domestic product of 58%. “Africa is meeting Maastricht criteria, even while Europe is not,” he said.
The organisers would not have known when they booked their conference venue in Marrakech that the region would undergo the tumult of the Arab Spring. One session was devoted to what the revolutions across the Arab world meant for Africa. Arab countries under their respective dictators engaged in little regional co-operation with their neighbours. There are, as such, opportunities for significant regional integration and development should there be favourable political outcomes.
New elites, whatever their political persuasion, are likely to focus on initiatives to foster growth and jobs, lest they go the way of their recent predecessors. As one speaker put it: “We know the way to Tahrir Square”.
Speakers stressed that the role of government was to develop infrastructure and provide administration and then leave job creation to the private sector.
Unemployment is not only an African or a North African problem. The BBC this week focused on unemployment across the Mediterranean, from Morocco to Italy, where youth unemployment in some areas stands at 40%. Unemployment, particularly youth unemployment, is so widespread in so many jurisdictions that it is hard to imagine enough entrepreneurs emerging to create enough jobs. The answer may be for the unemployed to stop waiting for someone to create a job for them and work out how to get their own income or, in the absence of income, food. They may need a government allocation of land to be able to do this but the world has changed and so must policy.
Kevin Davie travelled to Marrakech as a guest of Asea