The good, the bad and the ugly of African capital markets
Gross domestic product (GDP) growth in sub-Saharan Africa declined from 4.5% in 2014 to an estimated 3% in 2015. This decline is attributed to low commodity prices, particularly oil, rising borrowing costs and other domestic challenges such as power shortages, the Ebola epidemic, conflict and political and security issues. The decline is expected to continue in 2016 with GDP projected to reduce to 2.5%. This on-going decline is due to the issues mentioned above, compounded by tightening global financial conditions and drought in certain parts of the region.
The recent decision by the United Kingdom to exit the European Community has taken place against this background and the impact on Africa as a continent is currently unknown, however, the expectation is that it will add to Africa’s woes. According to the Brookings Institute, the potential areas where Brexit could impact on African countries are through the impact of Brexit on the global economy, reduced British outwardness when it comes to global development issues and decreased bilateral development assistance and trade.
It is not, however, all doom and gloom. According to the recently released World Investment Report 2016 (WIR 2016) foreign direct investment (FDI) into Africa dropped only 7% to US$54bn in 2015, which is significantly better than the estimated $38bn FDI inflows to Africa during 2015 that was published by the UNCTAD Global Investment Trend Monitor during January 2016. While FDI inflows to South Africa, Ghana and Nigeria dropped by 30.3%, 4.9% and 11.1%, respectively, FDI inflows to Angola increased by 352% to $8.7bn and to Kenya by 42% to $1.4bn. The WIR 2016 states that FDI inflows to Africa could start to increase during 2016 due to the liberalisation of investment regimes and privatisation of state-owned commodity assets by a number of African countries.
In recent years, many African countries have also implemented reforms facilitating the created private pension systems that are rapidly accumulating assets under management, largely as a result of Africa’s growing middle class, rise in consumption, increasing urbanisation and rising per capita incomes.
Pension funds play an important role in deepening financial markets and making cheaper funding available to corporations thereby contributing to national economic development and growth as they are long-term investors.
Historically and currently, African pension funds have invested heavily in domestic debt due to a combination of regulatory hurdles, risk adverse trustees and poor incentives. Many African governments are in the process of liberalising regulations in respect of the pension fund industry, thereby, allowing them to put money into certain alternative investments, including private equity, and to invest outside of their own countries. The rapid growth of the African pension fund industry is necessitating diversification of investment risk by trustees and fund managers, and this, together with more favourable regulation, is resulting in an increase in funding available for investment into listed equities, bonds and also into private equity.
According to the OECD Annual Survey of Investment Regulation of Pension Funds, the following regulations apply to selected African countries with regards to pension funds investing into listed equities:
- Kenya: Pension funds may invest up to 70% of the value of their total assets under management (TAUM) into listed equities on any of the stock markets in Kenya, Uganda or Tanzania;
- Malawi: Pension funds my invest up to 100% (direct investment limit) of the value of their TAUM into listed equities on the Malawian Stock Exchange;
- Mauritius: Pension funds may invest up to 100% (total exposure of fund including investments through collective investment schemes) of the value of their TAUM into listed equities on the Stock Exchange of Mauritius (10% into foreign listed equities), however, investments into a single entity are limited to 20% of AUM;
- Namibia: Pension funds may invest up to 75% (direct investment limit) of the value of their TAUM into listed equities. Namibian pension funds are subject to various restrictions regarding their equity investments including an investment limit of 30% into assets consisting of shares outside of Namibia;
- Nigeria: Pension funds may only invest up to 25% (direct investment limit) of the value of their TAUM into listed equities and such investments are subject to further restrictions;
- South Africa: Pension funds may invest up to 75% (same as main limit, look through principle applies) of the value of their TAUM into listed equities on the JSE Limited (Johannesburg Stock Exchange) and 25%, subject to further restrictions, into equities listed on a foreign exchange that is a member of the World Federation of Exchanges;
- Tanzania: Pension funds may invest up to 15% (direct investment limited) of the value of their TAUM into listed equities of which 5% may be invested into private equity;
- Uganda: Pension funds may invest up to 70% of the value of their TAUM into listed equities on any of the stock markets in Kenya, Uganda or Tanzania; and
- Zambia: Pension funds may invest up to 70% (but not less than 5%) of the value of their TAUM into listed equities on the Zambian Stock Exchange, subject to certain additional restrictions. Investments into foreign equities are limited to 30% of the fund’s size.
The above indicates that African pension funds are growing rapidly and have the legislative ability to invest into listed equities, particularly, in their own jurisdictions. The increased availability of local capital for development should lead to an increase in the number of African initial public offerings (IPOs) and listings, which in turn, should contribute to an increase in the liquidity of the African stock exchanges. What is needed, is more sizable local businesses coming to market in their local jurisdictions.
There have been 39 new primary listings in various African countries (including 22 primary listings in South Africa) during the past two years and many of these new listings have included an IPO which has been fully subscribed and in some cases oversubscribed. This supports the theory that capital is becoming available within Africa itself to invest into local businesses. If this is the case then Africa may be able to weather Brexit, and any potential negative effects thereof, better than expected.
Robbie Cheadle, (CA) SA Associate Director – JSE Advisory Services, Mergers & Acquisitions at KPMG