Why the Ghana Stock Exchange could be an exciting opportunity

In recent times, we have seen interest in Africa’s frontier markets gaining steam as more players are clamouring for new investment opportunities outside the traditional low-growth but more sophisticated developed markets.

New Africa-focused hedge funds and private equity firms are increasingly pushing into Africa, drawn by the dynamic economic growth and lucrative deals within the African region. More recently, Irish rock star Bob Geldof has raised USD 200 million for his “8 mile” Africa fund, while US firm Carlyle Group last year set up shop in Lagos and Johannesburg. We think a lot more is happening in this space and we should continue to see new Africa funds in 2012.

Africa encompasses five distinct and diverse sub-regions, with western Africa being the largest sub-region given that Nigeria is the dominant state in the west, with around USD 42.5 billion total company capitalisation (excluding cross listings). However, we are excited by the development of frontier markets such as Ghana.

From a liquidity perspective, the Ghana Stock Exchange (GSE) is set to improve on the back of new listings on the bourse. The GSE is targeting a total of 50 listed companies within five years, up from 34 currently, and will launch an alternative market this year to enable smaller companies to raise capital.

“Our target is to get 50 listed companies as early as possible to make the market look more viable and more interesting. We are giving ourselves three to five years,” said deputy managing director Ekow Afedzie during an interview with Reuters.

Furthermore, the GSE recently signed an MoU with Fidelity Capital Partners Limited (FCPL) in which the two organisations intend to work to promote the growth and future listing of companies, especially SMEs on the exchange. Under the MoU, the exchange will be promoted to investee companies of FCPL, thus enhancing the success of SME listings on the GSE.

The alternative market, which is set to be launched in the second half of this year, will largely focus on SMEs and will have more flexible listing requirements compared to the main board. Under rules that still have to be approved by the Securities and Exchange Commission, there will be no listing or application fees and companies must have a minimum capital of GHS 250,000, compared with GHS 1 million for the main index and the minimum number of shareholders required to list will be 20 compared to 100 on the main market.

The main bourse, which has a market capitalisation of GHS 50 billion, is aiming to add three or four companies by the end of the year and it is also hoped that this would include at least one bank. It is worth noting that just seven of Ghana’s 27 banks are listed on the stock exchange, and the Bank of Ghana is encouraging lenders to use the stock market to meet minimum capitalisation requirements of GHS 60 million ahead of the December 2012 deadline.

According to Afedzie, the bourse has also introduced rules for exchange traded funds and is aiming to list a gold-based ETF within the next month or two.

On another note, Ghana’s mandatory government pension scheme which entails an injection of around USD 400 million per annum on local capital markets through privately managed funds is also expected to boost efficiency and liquidity on the GSE given that 25% of the funds are expected to be invested in equities. The new reforms are part of a 2008 law that created a pension structure aimed at boosting savings in the country.

Overall, we believe Ghana is on the right track in positioning itself as a more attractive frontier market, as a more liquid exchange would be a very welcome development for investors seeking to get exposure to its forecast robust oil driven GDP growth over the coming years.