By Mukami Njue
While still in its developing stage, the African financial market is significantly contributing to the continent’s capacity to finance its key initiatives such as small enterprises, housing, automotive, infrastructure, creative and agriculture sectors. This market, made up of over 30 securities exchanges and a total market value of over $1.5 trillion, could do more for the development of the continent. But, to achieve this, we must be ready to answer some of the most pressing questions: how can we improve the current market infrastructure to increase liquidity and enhance investors’ market confidence? How can we enhance the regulatory, supervisory, and risk monitoring systems to increase transparency? And what are some ways we can boost capital-raising initiatives on securities exchanges like rights issues and initial public offerings (IPOs)?
Admittedly, our financial markets continue to tussle with several macro and micro factors such as political unrest and downgrades by global credit rating agencies. However, this is not in isolation as other markets tend to face it too. Dealing with these issues strategically could significantly improve the efforts being made to impact foreign investors’ confidence, which has seen the market fledgling but at a slow rate. Additionally, our capital markets are still underutilised for capital mobilisation, especially from Foreign Direct Investments (FDI) that account for less than 10% of annual capital flows. Thus, what can Africa do to reform the description of African capital markets from traits associated with it, such as low liquidity, fragmentation, and weak regulatory environments?
Firstly, the senior management of listed companies needs to strategically plan for regular meetings with both investors and analysts to build relationships. Through strategic efforts such as in-person meetings, roadshows, and investor conferences, the management creates an avenue to present the business strategies, outlooks, and financial performance, which gives the investors and analysts deeper insights into their operations and strategic direction. To run these initiatives, the company should be guided by an investor relations expert, in conducting investor targeting exercises, that will help the company understand the type of fund managers investing in the business and their investment styles. This could range from institutional investors and private equity firms to high-net-worth individuals and retail investors. Ideally, these meetings should be done at least 2-3 times a year.
Secondly, to mitigate the transparency issues, the markets should be more structured. Meaning, the key regulators should impose tighter measures that see to it that the listed companies are obligated and penalised, if need be, if they don’t make some of the key calendar dates available to investors and analysts in good time. This includes uploading the key dates and events such as earnings reports and annual general meetings (AGMs), on their investor relations microsites and the securities websites in good time.
Thirdly, with the International Monetary Fund (IMF) estimating over 40% of state-owned firms (SOEs) in sub-Saharan Africa to be unprofitable, governments should consider privatisation. The goal would be to draw in private investment which would result in the reduction of the financial burden and increase market activities of SOEs. However, the efficiency of this approach is tied to the stringent regulatory framework, better market conditions, and strategic planning for privatisation processes.
Fourthly, African financial markets should consider leveraging data analytics and machine learning that will help aggregate and standardise data from different sources. Additionally, machine learning can help analyse large amounts of historical and real-time data, hence identifying patterns that can support and predict potential market risks. This approach can help detect anomalies that would lead to biases, hence improving market transparency, trading volumes as well as asset valuation, which are baits to investors.
Lastly, African countries should consider issuing Eurobonds which could not only act as a benchmark for the corporate bond market but also an opportunity for countries to refinance existing debt at potentially lower interest rates. Additionally, Eurobonds present a broader pool of foreign investors. This approach will necessitate countries to impose stricter financial reporting and governance standards, which can, overall, improve transparency and efficiency, which has so far impacted the per capita GDP in some African countries by an average of about 10%.
Mukami is an investor and public relations consultant.
