October 28, 2011 / 6:04 AM / 8 years ago

Liquidity: the scourge of African stock pickers

BLANTYRE/NAIROBI (Reuters) - For an hour each morning, Malawi’s sleepy stock exchange shows signs of life, when an official takes to the trading room floor and calls out the names of the 15 listed companies.

A stock exchange employee walks past an index board in a file photo. REUTERS/ John Kolesidis

Sometimes, he is met with shouts of “offer!”, “offer!” from brokers keen to trade. But often, he is met with silence and another lonely session passes without a single exchange.

“Foreign currency and fuel are scarce, and most foreign investors have gone quiet,” said Davis Manyenje, the managing director of FDH Stockbrokers, one of four brokerages doing business on the Malawi Stock Exchange.

Poor but fast-growing, Malawi and other sub-Saharan African countries would offer huge opportunities to international equity investors — if it weren’t for the liquidity scourge.

Markets across the continent are hampered by a lack of liquidity, making it nearly impossible to take stakes in all but the biggest firms.

“With the exception of South Africa, we feel all sub-Saharan African (markets) are illiquid,” said Ronak Gadhia, Africa equities research analyst at London-based frontier markets specialist Exotix.

“Most of our investors are unable to invest outside the big 2 markets, and even then their investable universe is usually the largest 5-10 stocks,” he said, referring to Nigeria and Kenya, the two biggest markets outside Johannesburg.

In Johannesburg, home to the continent’s biggest equity market, daily turnover this year has averaged a considerable $1.7 billion a day, as of the end of September.

That trade dwarfs the rest of sub-Saharan Africa. Nigeria, the next largest bourse, has averaged just shy of $17 million in daily trade this year, while Kenya has averaged $3.6 million.

In Malawi, the average has been just short of $210,000.


“You don’t have enough companies that are listed in Africa. And those that are listed, there isn’t enough liquidity, so if you are buying in or out you move the market,” said one private equity banker who focuses on sub-Saharan Africa

In Kenya, which has 58 listed firms, most of the trade is concentrated in a handful of stocks such as telecoms operator Safaricom, brewer EABL and banks such as Equity Bank.

The situation is even more stark in nearby Uganda, where just three companies dominate the trade volume, out of a total of 14 listings.

The paucity of listed firms means that stock prices in many African markets are artificially high, because local institutional equity investors are forced to keep re-investing in domestic stocks, the private equity banker said.

Liquidity is also a serious constraint on African asset allocation, said Graham Stock, chief strategist at Insparo Asset Management in London.

“The smaller exchanges are struggling to attract investments because of the scale of the moves in say Uganda, even Kenya really... These are moves that are expensive to hedge out so you do have to be cautious and size positions accordingly.”


For growing African companies looking to reach a wider investor base, the only solution may be a dual listing on a major exchange such as Johannesburg or London.

Senegalese telecom Sonatel is one African company currently mulling that option.

A $2.6 billion firm, Sonatel is 40 percent owned by France Telecom and is the largest company on West Africa’s regional BRVM bourse.

While a major exchange in Africa, the Ivory Coast-based bourse is hardly a high-profile one for global investors.

“For our stock, the main problem we have is the liquidity of the Abidjan market,” CFO Aboubacar Sadikh Diop told Reuters in an interview in Johannesburg this month.

“Our investors want us to have a secondary listing to promote the liquidity of the stock.”

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