Investing in African Stock Markets

Posted by Ryan Shen-Hoover on Tuesday, September 1, 2009 at 9:36am.

Investing in African stock markets is not for the faint of heart.  Finding a reliable stockbroker can be difficult;  Companies’ casual approaches to financial reporting often make good analysis impossible; and managing multiple trading accounts from a faraway time zone is a hassle.   In the past few months, however, some changes have taken place that should (in big and small ways) make the continent a safer and easier place to invest.

We start in Nigeria. The Nigerian Stock Exchange has a well-deserved reputation for being a wild and woolly place to invest.  Listed companies are not required to abide by International Financial Reporting Standards (IFRS). Corruption is all too commonplace.  Stock price movements seem to have little connection to fundamentals.  In fact, the market bears far too much in common with a casino.

Things may, however, be starting to turn in the right direction.  The new governor of Nigeria’s central bank, Lamido Sanusi, summarily dismissed the CEOs of five of the country’s largest banks in August.  He did so in part because the banks engaged in such aggressive lending practices that they threatened to bring down the country’s financial system.  Mr. Sanusi then publicly named the banks’ biggest deadbeat borrowers and demanded they settle their debts or else face arrest.  It was an unheard of development in a place where most VIPs are generally regarded as beyond the reach of law.

Other recent Nigerian bank reforms include a requirement that all banks adopt a common year-end.  This will help prevent the firms from artificially bolstering balance sheets by shuffling assets amongst themselves.

In Kenya, it is the stockbrokers who now face increased scrutiny.  When three Kenyan brokerage houses collapsed in less than three years, it became abundantly clear that the industry was in need of strong regulation.  The bankrupt firms had their remaining assets frozen, and their customers were left in the lurch.

The Kenyan Capital Markets Authority (CMA) has now responded with rules that require brokers to publish their full set of financial results in three major newspapers on a half-yearly basis.  It is hoped that investors can thus avoid dealing with firms with weak asset bases.  Brokerage houses will also be required to meet a $3.2 million minimum capitalization level by the end of 2010.

Finally, a number of African exchanges are making moves toward consolidation. Tanzania recently dropped its opposition to the creation of a common East African exchange.  The Stock Exchange of Mauritius indicated that it remained in acquisition negotiations with the Johannesburg Stock Exchange (JSE). And the JSE has launched its Africa Board, which seeks to attract cross-listings from other African markets.  This is all very good news for retail investors who want to create a diversified African stock portfolio, but who blanch at the prospect of opening a dozen different brokerage accounts to do so.

Lest I’ve made the case too strongly, let me stress that huge scope for reform remains. However, Africa’s capital market development is real. With each successive year, stock markets play a greater role in the continent’s economic growth.