African capital markets are lagging behind the growth of global markets. African markets account for 1.4% of global market capitalization and this share is falling, says Nandini Sukumar, CEO World Federation of Stock Exchanges. 26 African exchanges averaged 2 IPOs per month across the continent, compared to 670 on global exchanges in December 2021 and over 700 in July 2021.
The market capitalization of African stock exchanges was $1.2 trillion at the start of 2020, rising to $1.3 trillion by July 2022. Meanwhile, the market capitalization of the world’s stock exchanges climbed from $80 trillion to $95 trillion.
Mrs. Sukumar spoke in African Stock Exchange Association conference on December 8-9.
Equity accounted for only 5% of capital raised in African markets, with 95% of capital raised through bonds. Globally, equity accounts for 14% of raised capital. African issuers and fund managers should look to equity for more efficient capital raising.
Africa is missing out on the growth of retail investor deals. Ms. Sukumar cited a global market where 5 million retail trades per month at the start of 2016 doubled to 10 million per month by 2019 and then tripled again to 30 million per month by mid-2020. Retail trading increased significantly in 16 of the 23 global markets surveyed stock market The drivers are new technology, social media and a lock-in that frees people up to research, all coupled with low interest rates, lower prices and higher volatility.
What can African stock exchanges do?
Ms Sukumar said African exchanges looking to encourage trading by retail investors should provide: “Access to data and research as the main driver, followed by changes in regulatory and market structures”. Fees to brokers and intermediaries and changes to tax laws, including taxes on capital gains and dividends, were also important.
She highlighted exchanges that are reaching out to retail investors with new educational materials, including X-Mobile Nigerian Exchange App with links to stockbroker websites and dedicated liquidity providers that facilitate buying and selling, as well as smaller tick sizes (minimum price movements).
African capital markets need more liquidity, more active institutional investment, investor protection and better disclosure for retail investors, reduced taxes and other frictions, and more IPOs and innovation.
Collaborate with other stakeholders
Exchanges cannot bring about change by themselves. Here are some tips highlighted by Ms. Sukumar:
- Increasing liquidity is the lifeblood of markets – improve diversity in the world of investors
- Improve institutional and investment participation, domestic and international. You can support institutional investing with market design, including margin accounts, short selling rules, block trades and market making
- Retail investments enhanced by investor protection, disclosure, financial education and new products
- Reduce market friction
- Listings and IPOs: Call on the state to commit to listing state-owned enterprises, fostering innovation and enhancing transparency in the private market alongside listing on public markets. Listing can improve management.
Later, Reverend Daniel Ogbarmey Tetteh, Director General, spoke Securities and Exchange Commission of Ghana (SEC Ghana) he said that in his view the key word is “alignment”, with the need to ensure that the government, regulator and stock exchange are aligned. For example, the government can list some of the state-owned enterprises, offer tax incentives and even make the list mandatory for some enterprises. Many African exchanges have enjoyed their biggest IPOs after telecom companies were forced to list as part of the conditions for renewing their licenses.