What retail investors need to know about African Frontier Equity Markets


The Africa frontier equity market space has largely been dominated by institutional investors with very minimal participation from retail investors. Over the past 10 years or so, we have witnessed the emergence of Africa-focused Funds across the globe – set up to achieve long-term capital growth by investing in African equities. The appetite for African equities largely rose on the back of prospects of good returns and a means to diversify risk. In recent years, countries in SSA ex SA exhibited high GDP growth signals coupled with bottom-heavy demographic profiles, implying sustained demand growth. With average GDP growth rates of about 5.0% as well as population growth rates greater than 2.0%, the consumer markets in countries such as Ghana, Nigeria and Kenya also became a hotspot for a number of Global Emerging Market (GEM) funds looking for alpha.  Activity on African stock markets has indeed been dominated by foreign funds with cross-border mandates that allow them to diversify risk. The Zimbabwe Stock Exchange (ZSE) is one good example of a frontier market that has benefited from foreign portfolio investors, mostly from the USA, UK and Europe.

The African Continent

Source:piggybankadvisor.com

The good news is that retail investors can now participate in African frontier equity markets through various platforms and strategies. The following are some of the methods and strategies that retail investors can use to participate and gain exposure in African Frontier Equity markets;

  • Africa Frontier Market Investment Platforms – A number of Africa-focused stock broking firms have set up investment platforms that allow for retail investors to buy and trade stocks in Africa (with reasonable minimum amounts). This is largely done through Commission Sharing Arrangements (CSA) with local registered brokers in various markets such as Nigeria, Kenya, Zimbabwe and Mauritius;
  • Investing via international exchanges – Some resource companies with operations in Africa are listed on exchanges such as the TSX, ASX or LSE where there are accessible to retail investors. Likewise, some South African or JSE-listed companies are increasing their exposures in some of Africa’s frontier markets. Investors can gain exposure to these markets by adding such stocks to their personal portfolios; and
  • Investment via Africa-Focused Funds – Individuals can access frontier markets by choosing an investment fund run by experienced managers with in-depth, on the ground knowledge of these markets. A number of investment houses have set up Africa-focused Funds.

Overall, it should be cautioned that frontier market investing is a different ball-game altogether and is definitely not for the novice investor. Most African economies are still commodity-driven and therefore a slowdown in demand from Asian economies has a bearing on the performance of the economy and stock market.  Risks also remain elevated on the back of currency issues and other policy failures (political risk). In addition, frontier markets tend to be volatile and lack liquidity. Trading costs are also high when compared to more advanced exchanges such as the JSE and NYSE given the lack of Direct Market Access (DMA). However, with high risk also comes the potential of higher returns.

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