Mention the word Africa and the first thing that comes into peoples’ mind is misery, mismanagement and lawlessness. In spite of these stereotypes, Africa is emerging the best investment destination for equity investment, compared to other emerging stock markets in Asia and Latin America. Africa has posted the best performance in the last half decade, making more and more foreign investors to develop interest in its equity markets.
Notwithstanding the inefficiencies associated with most African stock markets, the return on investment in most of them is quite impressive, sometimes exceeding the performance of well developed and efficient markets like USA and Japan. Zimbabwe, for example, with all its tribulations managed to give a return on equity investments of more than 1200 per cent, beating the abnormal rate of inflation of about 1086 percent last year. Moreover, Egypt posted the highest returns in the world with the main market index gaining 162 per cent in US dollars in 2004 and 2005 consecutively.
Emerging African stock markets are touted by potential investors as inefficient in terms of execution of orders, price manipulation, insider trading, lack of liquidity and market failure. Many of them would rather invest in American and European markets at low returns on investment than get a higher return rates from African markets.
The insecurity that foreign investors peg on African stock markets is unwarranted, for those who have dared invest in these ‘unknown waters’ have a sweet story to tell. As small as the African stock markets are, with exception of the Johannesburg stock exchange, they still give the thrill and rewards of efficiently run stock exchanges. Over the last few years, African bourses have been experiencing a bull run. Foreign investors who were daring and patient to invest in African stocks early enough are smiling their way to the bank now.
The size of firms in most African countries is constrained by several factors that affect the size of the bourse. Very few small and medium size firms can fulfill the requirements of their indigenous Capital Market Authorities. However, this should not be the issue in any investment decision. The viability, performance and return on investment of the business are what matters. Most of the listed companies in African countries have all these in place just waiting for investors to finance their expansion and growth prospects.
For investors looking for a place to diversify their investments and differentiate on returns, Africa offers a greater potential than other emerging markets in the world. 'Africa' here does not refer to South Africa alone, but also destinations like Nigeria, Rwanda, Kenya, Uganda, Zambia, Cote d'Ivoire and Mauritius among others.
South Africa has already received more than its share of foreign investments in equity through its strong Johannesburg stock exchange. With the Asian market facing adverse effects from the war in the Middle East and the Latin America region not being so lucrative, African equity markets stand out as the potential off shore investment destination that is viable for any foreign investor.
African countries should not only look at the high rates of return as a point of attracting investors, but also work on mending their country's political terrain, combat corruption and improve the way the private sector conducts business. This will improve investor confidence in the operation of our stock markets. A foreign investor will only be attracted to a country which has a conducive economic environment for both domestic and foreign investors.
The challenge facing most African governments is how to create a stable and attractive economic environment for investors. Such an environment will mobilize both domestic and foreign private investors to the capital market. Strong emphasis on increasing private flows to Africa will help overcome the region's resource gap. There is no better place to develop this private capital flow than through emerging Africa stock markets.
By Kevin Mwanza
Mr. Mwanza is an African Executive Staff Writer
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