The lack of engagement in local stock markets by institutional
investors is one of the reasons why the stock markets in Africa are not
as vibrant.
The third edition of the Africa Financial
Markets Index released last Wednesday says that that although capital
markets in Africa are projecting a collective progression towards a more
robust and investment-supporting environment, the participation of
local institutional investors remains subdued.
Of the
20 stock markets surveyed in the index, only South Africa, Morocco,
Nigeria, Botswana and Namibia have deeper presence of pension funds that
hold huge resources and can play a vital role in the development of
capital markets.
Across Africa, declining share prices
have made small and retail investors exit bourses in droves, leaving the
exchanges in the hands of foreign investors.
With a
majority of stockmarkets in Africa feeling the effects of retail
investors flight, the reality is that local institutional investors such
as pension funds are avoiding stock markets because there are no
attractive products.
Pension funds
For many countries including Kenya, Tanzania, Uganda and Rwanda,
limited product availability at the stock markets has constrained
pension funds to investing in government securities.
“Building
pension fund assets through innovative and inclusive schemes can help
spur demand for a wider range of financial products and lead to greater
market activity,” reads the index by Absa Group.
That
pension funds in East Africa are giving the stock market a wide berth is
evident considering that although Kenya’s pension assets rose by 17 per
cent to $10.5 billion in 2018, government securities account for 39 per
cent of pension assets followed by real estate at 20 per cent.
Fund
managers in Kenya attribute the pension funds affinity to fixed incomes
to the fragmentation of assets in many small schemes, a broken
relationship between trustees and managers and limited capacity.
In Uganda, government securities account for 75 per cent with equities accounting for only 14 per cent.
The
situation was not any different in Tanzania and Rwanda considering the
countries had an average score of 22 per cent on the capacity of local
investors.
This compares badly to Namibia where 56 per
cent of pension fund assets are invested in equities and only 22 per
cent in fixed income and Morocco has a large ratio of pension assets to
listed securities at 52 per cent.
“The lack of
knowledge and expertise by trustees and other asset owners hinders the
development of new financial products by reducing their demand for more
sophisticated assets and strategies to diversify returns,” said Jeff
Gable, head of research at Absa Group.
In Kenya, the
push for pension funds to diversify their asset classes has resulted in
the formation of the Kenya Pension Fund Consortium that targets to pool
$50 million to invest in infrastructure projects, an indication that
equities are not a priority.
The index records openness and attractiveness of countries to domestic and foreign investment using a variety of parameters.
Financial
markets in Africa recorded positive progress when measured on six
pillars of depth, access to foreign exchange, transparency, capacity of
local investors, legal environment and macroeconomic opportunity.
Mergers,
new regulations, innovative financial products, policies incentives and
favourable tax regimes are driving the growth for a majority of
countries.
Advanced financial market
For
a third year running, South Africa maintained the top position as the
most advanced financial market in Africa followed by Mauritius which has
replaced Botswana in the second position. Nigeria, Africa’s largest
economy, is ranked sixth.
Kenya with a score of 65
maintained its third position with Tanzania with a score of 55 was at
position seven, Rwanda at position nine with a score of 53 and Uganda 10
with a score of 52.
Tanzania’s score improved
significantly from 43 in 2028 driven by a strong investment environment
although its stock market remains small and illiquid.
East African countries projected mixed fortunes across various parameters.
East African countries projected mixed fortunes across various parameters.
Kenya
scored high on legal environment, Uganda and Rwanda performed well on
access to foreign exchange, Tanzania and Rwanda were poor on market
depth, but Tanzania also performed poorly on macroeconomic opportunity.
In
Uganda, they are pushing for mandatory listings for firms in strategic
sectors such as telecoms, tier one banks and mining firms to increase
the number of listed companies on its bourse.
Kenya on
its part wants to boost the venture capital and private equity markets
to create a pipeline of smaller firms to pursue initial public offerings
while Tanzania has created a tax ombudsman’s Office to handle disputes
on tax laws.
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