Why do the global emerging market funds ignore African-listed securities? Are mutual funds discriminating against Africa?
Not at all, said Todd Moss from the Center for Global Development in a presentation on his recent work to Bank staffers yesterday. Turns out there's no market failure at all. The problem lies with the African stock exchanges themselves.
Despite their recently good performance (as described in a prior post), Sub-Saharan African stock exchanges lose out because of their small size and very low liquidity. As he put it, "the New York Stock Exchange trades more before tea than all of Africa trades in a year." The glaring exception is the Johannesburg Stock Exchange (JSE), which is as large and popular as any emerging market stock exchange.
The bottom line - a stock exchange must have $50 billion in market capitalization and $10 billion in value traded to attract any interest from global emerging market funds. Of the 15 African exchanges, only South Africa hits either metric.
Moss thinks African exchanges might get a boost from large privatizations, but argues that the real key is to focus on investment climate issues. Big home-grown firms, hungry for equity finance, are needed to build up stock markets, which in turn attract mutual fund managers.
So where are the big African companies? Barriers to entry keep African firms out of the formal sector. Once they formalize, barriers to growth - such as higher infrastructure costs and "unofficial payments" - keep African firms small. For more on these barriers to growth, see the World Bank paper "Business Environment and Comparative Advantage in Africa: Evidence from the Investment Climate Data" from Benn Eifert, Alan Gelb, and Vijaya Ramachandran.
I'll update this post with Todd Moss's new paper once I find it online.
Update: As promised... Why Doesn't Africa Get More Equity Investment? Frontier Stock Markets, Firm Size and Asset Allocations of Global Emerging Market Funds, by Todd Moss, Vijaya Ramachandran, and Scott Standley
Join the Conversation