An overhead view of the African continent – with the railroad infrastructure highlighted – provides a stark reminder of its colonial past, and especially the extent to which infrastructural development focused on exports to the rest of the world, rather than on transport on the continent.
Not only are the clear majority of railway tracks laid down between the mining operations and ports of export harbours; many of these railway sections cannot be connected to one another as there are differences in gauges and other specifications, making them incompatible with one another.
The former “Dark Continent” is currently on a significant infrastructure development drive – especially of the physical kind.
Simultaneously, technological “highways and rural byways” are also being rolled out, as both telecommunications and financial services providers compete to reach the millions of unconnected and unbanked throughout the “Middle Africa” region – essentially sub-Saharan Africa excluding South Africa.
Unless we heed the lessons from the past, we run the risk of making the same mistakes in technological and financial market infrastructural development, as were previously made with the rail infrastructure.
An analysis of Society for Worldwide Interbank Financial Telecommunication (SWIFT) data on transaction volume in Africa present warning lights of development that is too focused on traffic flow in and out of the African continent (like the export of raw materials and the import of beneficiated finished goods), and not enough on intra-African trade and investment “traffic” flow.
One positive indicator is the shift in focus from foreign direct investment (FDI) to intra-Africa investment (IAI), as the realisation sets in that there are vast amounts of capital already available on the continent, but that much of this lies idle as it is tied up in the coffers and pension funds of the governments across Africa.
As much as the pro-FDI protagonists, investment bankers, private equity funds and venture capitalists scramble to secure external capital flows to fund growth on the African continent, there are several initiatives underway to unlock some of the idle capital already present in Africa.
The problem is that a cursory glance across the capital markets of Africa, most notably the stock exchanges, highlights the (apparent) dearth of options available to invest and participate in one of the highest growth regions in the world. The reality is, however, not that there are no investable opportunities available in the African growth story, but rather that many of these opportunities are not to be found on the stock exchanges on the African continent.
This is most prevalent in the mining and resources sectors – it is quite stark that one will find very few metals and mining, resources or commodities company listings on the African Securities Exchanges Association (ASEA) equity markets, other than the JSE in South Africa. This is even though Africa is recognised as one of the richest sources of minerals, precious metals and gems in the world.
One must look much further afield to the stock markets of London, Toronto and Australia to find listings of the companies that are involved in mining operations on the African continent.
The reason for this is quite simple: the complexity and capital-intensity of mining and exploration activities limit the range of financing partners available to these companies. They must turn to the capital markets that understand mining and know how to value and assess it.
The aforementioned markets provide both the analytical skill and financial depth that these operations require from investors. Unfortunately, unless this is changed, Africa runs the risk of being further hampered by a form of neo-colonialism on the continent, again to the detriment of its people.
Investment capital provides direct benefit to the companies with mining operations in Africa, but none of the return on that capital accrues to the local markets.
To add insult to injury, all the spin-off benefits within the financial services industry accrue to the foreign capital market and none to the local market. This is akin to raw materials being exported from the African continent, the beneficiation of those materials being undertaken in other markets, only for the final product to be imported back to the country of origin – obviously at a much higher price!
Investors in Africa – both institutional and retail – do not have ready access to investments representing a large part of their own countries’ GDP, if at all. Thus, they largely miss out on the opportunity to participate in this aspect of wealth creation.
Giving investors in Africa direct access to the wealth generated from their own natural and human resources would amount, in a small way, to rolling back the impact of colonisation, without having to “repossess” or take back any assets from existing investors.
Fortunately, we don’t have to be slaves to our past – i.e. just because the legacy of our continent was outward looking, doesn’t mean we must continue in that form.
In fact, we can change that and refocus on what we can do for ourselves, such as finding better ways to improve the liquidity of our markets. It is thus good to see that not all financial infrastructural development is of the retrograde kind. There are some initiatives that are clearly aimed at facilitating and accelerating intra-African trade and investment.
One key to unlocking the access to these wealth-generating assets lies in exchange-traded products (ETPs) and global depository receipts (GDRs). An exchange-traded fund (ETF) that tracks an index of companies (e.g. mining and commodity stocks) that operate on the African continent, irrespective of the stock exchange on which they are listed, can provide exactly the type of exposure required.
Furthermore, by creating such ETFs and making them directly available to investors across the continent’s stock exchanges (i.e. list the ETF units on ASEA member exchanges), will provide the opportunity for the entire spectrum of investors – from pension funds to retail investors – to participate in the benefits and wealth created by Africa’s natural resources and growth sectors.
As global companies have expanded their footprint into Africa, they too extract value from African growth dynamics to boost their own value proposition, but without leaving behind much benefit beyond the first round of economic injection. It is very difficult to reverse this process by convincing individual companies with operations on the African continent to come and list their equity on African stock exchanges.
Simplistically, GDRs can be viewed as single-stock ETFs; they provide the means to offer direct access to such global companies, operating in Africa, by listing a GDR over them on African stock exchanges.
Not only does this provide further locally relevant opportunities for investors across the continent, but at the same time, trading in these instruments in the local markets can go a long way to developing the stock exchanges and related financial services industries in these markets. This will broaden the investor base for the listed companies and allow a better spread of the wealth generated, without any sacrifice or penalty required from the current investors.
Pension funds in Africa have the potential to become prominent continental investors, although it may require an update to their allowable asset allocation limits and other related regulations. Much of their current asset base is held in sovereign bonds of their own government, which may have been appropriate during a time of double-digit coupons/interest rates and single-digit economic growth rates.
However, as the demographic shift on the continent continues toward a younger and more urbanised population, so the risk appetite increases along with its ability to shift asset allocation further along the risky asset curve.
The obsession with liquidity as a prerequisite for pension fund investment is a moot point, especially in the context of multi-decade investment horizons and the desire for impactful investment to create the future required and desired by the younger members.
Pension fund assets can be powerful agents of change, but it requires trustees and fiduciaries with vision and fortitude – to assess investment opportunities from the perspective of the future it can create, rather than the past from which it has come.
Africa has made a key shift in focus – from looking towards the rest of the world for development aid and investment flows, to an intra-Africa focus of how to unlock investment opportunities on the continent, and building infrastructure (especially of the technological kind) that serves the people of the continent before it serves its former colonial masters. This shift in mindset offers a win-win solution to investment in and for Africa!
Nerina Visser is a strategist at etfSA.
This is part of the April 2017 Collective Insight survey, which was published in the 13 April edition of finweek. For the entire survey, click here. To buy and download the magazine, click here.