Struggling African bourses are seeking to woo institutional investors to increase their portfolios held in private sector equities as foreign investors flee domestic markets.
According to experts who attended the Africa Financial Industry Summit in Lomé, Togo, last week, institutional investors, who have traditionally prioritised investing in government bonds that generally offer higher and more predictable returns, have a huge potential to invest more in stocks and equities than they currently do.
Increasing their portfolio in equities and stocks could serve the needs of the continent’s private sector businesses that rely on these markets to raise capital as foreign investors, who have always dominated the continent’s bourses, flee amid a slump in liquidity globally.
Domestic capital markets
Experts say investing more in the domestic capital markets also serves the needs of these institutional investors, such as pension funds and investment banks, since it helps reduce their risk exposure and maximises returns, but their participation in stock markets has traditionally staggered.
"The narrative has been that the funds are invested in government bonds. Yes, about 60 percent are in government bonds, but about five years ago, it was 80 percent. That’s progress and we think that that number [invested outside bonds] will increase," said Dave Uduanu, CEO of Nigeria’s Access Pension.
African capital markets have lately suffered massive capital flight by foreign investors due to increased risk perception resulting from currency depreciations and mounting economic shocks.
At the Nairobi Securities Exchange (NSE), for instance, foreign investor participation has dropped from 50 percent of all transactions in July last year, to 44 percent in September this year, as the amount sold by the foreign investors exceeds the amount taken up by others.
Yet, as of September, institutional investors held only 36 percent of the equities at the Nairobi bourse, while retail investors had 45 percent. In the bond markets however, corporates hold over 90 percent, while individual investors held only 5 percent, according to statistics from Kenya’s Capital Markets Authority.
But with the flight of foreign investors amidst liquidity slump both internationally and locally, the Nairobi bourse, and many others across the continent, have recorded a decline in activity and share performance and rating.
According to experts, a little more participation by institutional investors could not only turn their fortunes, but significantly contribute to the growth of the continent’s economies as well.
"Generally, capital markets reflect overall development of the economy, in terms of economic activity, human capital, regulation, and policy," said Aliou Maiga, director for financial institutions in Africa at the IFC.
"It is very difficult to expect that the capital market would provide the same level of support to the economy in countries such as in Southern Africa as they would in more developed economies where investors have more capacity in general."
Mr Maiga told The EastAfrican that as the continent works on redefining the ‘inaccurate’ risk premium attached to African markets currently, there is need to boost capacity of corporates to raise finance from the capital markets so they can drive economic development.
"We need to do this by making it easier for corporates to fund themselves, not only from bank loans, but also by going to capital markets, which will happen by changing regulations, reducing cost, and building awareness and capacity so that issuances can go to markets easily and cheaper, and investors can invest faster and cheaper," Mr Maiga said.
Traditionally, investing in government paper has been easier and cheaper, making institutional investors prefer them, in turn crowding out the private sector investment, according to Mr Maiga. Structural difficulties to listing and high transaction costs have also hindered private companies from using the capital markets as a source of finance.