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RisCura’s annual Bright Africa report is a highly recommended read on Africa’s capital markets. Check out the interactive website and download the short report at brightafrica.riscura.com.
Africa’s equity recovery started in the last quarter of 2016, with an uptick in index returns across the different regions. Growth had stopped in African stock markets from 2014 to mid-2016. RisCura says this was “largely due to decreasing commodity prices and a flight to safety from global investors. In 2015 the region saw the lowest recorded growth rate since 1998.” Bright Africa singles out Kenya as “Africa’s overall winner in terms of listed equity performance”. It is relatively immune to the commodity cycle, has a business-friendly environment and is a beneficiary of continued integration of the East African Union. However, returns only represent a compounded annual return of 10% in US dollar terms.
These key challenges facing investors into African listed equities should top the agenda for capital-markets policy-makers, operators and regulators.
The Johannesburg Stock Exchange turns over a respectable $1.8 billion a day. After that, Africa’s stock exchanges “remain stubbornly illiquid”, according to Bright Africa. The second most liquid is the Egyptian Exchange (the report refers to one of its exchanges, the Cairo and Alexandria Stock Exchange CASE) with $72m traded daily. Next are the Casablanca Stock Exchange at $17m a day and the Nigerian Stock Exchange (NSE) $15m in turnover for 2018, each less than 1% of the JSE daily trade.
Daily turnover on the NSE soared 71% during 2018, due to a median increase in turnover of 125% across its 10 largest companies, all in the financial sector. The key boost was recovery in world oil prices seen towards the end of 2017, causing improved economic fundamentals and a boosting investor sentiment. Highest average daily turnover value across African exchanges, excluding JSE, and most of the market capitalisation are with the financial sector. Morocco has 30% of the financial sector capital (ex-JSE), followed by Egypt (18%) and Nigeria (15%).
Free float and liquidity
The “free-float” represents the proportion of a listed companies’ shares that are available for active trading and excludes: any directors’ holdings, shares with lock-in periods and those otherwise held without the intention of trading pursuant to a regulatory or commercial purpose. Excluding these shares from the liquidity consideration, we get a truer representation of the liquidity in an exchange. The JSE has an adjusted market capitalisation of $750bn and a free-float of 73%.
On average larger exchanges exhibit higher levels of free-float, as expected, but this is generally low across the exchanges. The free-floats of the Egyptian and Moroccan exchanges average 26% of their market capitalizations. Both exchanges have higher overall market capitalizations than Nigeria, but the NSE has a higher free-float at 46% of market capitalization, and so a higher adjusted market capitalization. The Ghana Stock Exchange tops the African rankings as the highest free-float (ex-JSE) at 66%, followed by Namibia at 61%. The lowest free-float level relates to the Bourse Régionale des Valeurs Mobilières (BRVM), free-float of only 2%.
Cost of trading and brokerage commissions
RisCura says: “The cost of trading on African exchanges is substantially higher than developed markets”.
Bright Africa report says it is difficult to obtain cost of trading information. “A significant portion of trading fees is made up of brokerage commissions… The limited pool of licensed brokers in each country results in very low power to investors to switch to a more affordable competitor. However, the low volume of trades on these exchanges means that brokers charge more on each trade to cover their costs. It’s a difficult position to get out of without incentivization for brokers to lower their fees.”
The report’s verdict: “Trading costs of up to 4% makes short-term trading strategies unviable, further reducing the liquidity in these markets. Egypt’s relative high liquidity, in comparison with Nigeria (which has a similar free-float), can at least in part be attributed to the significantly lower cost of trading.”
The cost of trading below represents the cost of a single transaction, but in order to realise profits investors would need to also sell shares resulting in double the costs. The substantial portion of other fees in South Africa, mostly represent Securities Transfer Tax, which is not charged in most developed markets.