AFRICAN STOCK MARKETS

african capital markets r.yofi grant Databank Group, Africa’s Capital Markets Growth 600 569 552 500 400 344 325.4 309.5 300 249.3 225.8 200 184.8 195.2 283.3 281.3 260.8 244.7 113.4 100 0 92 93 94 95 96 97 98 99 '00 '01 '02 '03 '04 '06/05 Mkt Cap $ billions 2 Markets Profile Summary (June ’05) Country South Africa Egypt Botswana Capitalization (US$ bn) 409.11 48.70 43.20 Listed Companies 386 793 28 Market P/E na 22.80 12.50 Morocco Nigeria Ghana Zimbabwe Kenya Tunisia Mauritius Ivory Coast Zambia 23.22 14.29 10.44 6.50 5.10 2.88 2.30 2.02 0.60 52 212 29 79 48 na 40 38 26 na 13.27 16.68 na 20.90 na 24.83 na na Namibia Malawi Swaziland Uganda Total 0.31 0.20 0.18 0.10 569.13 29 10 6 7 1,783.00 na 7.47 15.02 6.90 140.37 3 Developments & Characteristics – Growing Market Size • The number of markets have grown from 12 in 1992 to 19 in June 2005 • Market capitalization is small but has grown significantly from US$113bn in 1992 to US$569bn in June 2005 • Market capitalization outside S.A has increased from US$99bn in 1992 to US$160bn in June 2005 • Number of listed companies has increased from 1,771 in 1992 to 1,786 in June 2005 • Number of listed companies outside S.A grew from 1,088 in 1992 to 1,397 in June 2005 4 Development • Growth of Capital markets over past 5 years can be generally attributed to improvement of general economic factors ie : – Supply side reforms including liberalization of domestic controls, dismantling of public monopolies, aggressive privatization and reduction of trade barriers – Implementation of more flexible and competitive exchange rate regimes – Fiscal reform resulting in broad money growth rates, inflation and interest rates 5 Developments & Characteristics • The listed blue chip companies in various markets are mostly multinationals operating in Africa e.g. Barclays, Unilever, Diageo, SAB, Stanchart, Societe Generale, Shell, Orascom, etc, other domestic coys are Kenya Airways, Sonatel, AngloAshanti Gold National Social Security Funds are the major institutional investors in the markets Regulatory changes have led to the establishment of mutual funds in some countries in recent years, e.g. Ghana, Nigeria • • • Markets are becoming more liquid as most of the countries achieve macro economic growth Poor but rapidly improving regulatory structures in several countries 6 • Developments & Characteristics • Studies report conflicting results on the weak-form efficiency of African stock markets but most indicate that the markets are inefficient in the semi-strong form (i.e they respond very slowly and biasedly to corporate announcements) • Markets tend to be very cheap for years and present very good opportunities for exciting long-term returns • Secondary bond markets yet to be developed with only few bonds listed on stock exchanges on the continent 7 Performance • Returns on African stock markets have improved significantly in the past 5 years • Other regions outperformed Africa over the period 1994 to 2005 • Africa outperformed other regions significantly in the more recent period of 2001 to 2005 and likely to be sustained • Performances being driven by improving economic management & growth, improving regulatory environment, better political governance, increasing foreign portfolio investments in the continent 8 Regional Stock Market Performances in USD (Dec 2001-June 2005) Africa Average MSCI EM Europe MSCI Latam MSCI AC Asia Jappan Nikkei MSCI EU UK FTSE MSCI World Free MSCI N.America USA S&P 6% 4% 35% 30% 24% 22% 14% 85% 141% 186% 0% 50% 100% USD Returns 150% 200% 9 African Stock Markets Returns in USD (December 2001 - June 2005) 800% 700% 600% USD Returns 681% 516% 500% 400% 300% 200% 100% 0% 484% 311% 201% 149% 112% 90% 54% 49% 43% 43% 31% 29% Ivory Coast Namibia Morocco Tunisia Malawi Botswana -2% -67% Zimbabwe 10 Uganda Zambia South Africa Mauritius Nigeria Egypt Kenya -100% -200% Swaziland Ghana Some Exciting Examples • Epack Investment Fund managed by Databank Asset Managers which invests in 6 African markets registered returns in USD terms of 714% from inception (Oct. 1996) to June 2005 • Africa Frontier Fund run by Emerging Markets Managers L.L.C has produced cumulative USD returns of 283% from inception (Oct 1993) to June 2005 11 Ghana Market Return 1999 - 2004 180% 160% 140% 120% 100% 80% 60% 40% 20% 0% -20% -40% 12 157% 91.70% 46% 15% 11.40% 2001 2002 2003 2004 1999 2000 -15% Ghana Market Return USD 1999 - 2004 160.00% 143.38% 140.00% 120.00% 100.00% 80.00% 60.00% 41.40% 40.00% 20.00% 5.78% 0.00% 2000 2001 2002 2003 2004 13 86.50% 26.80% Ghana Market capitalization growth Mkt Cap. Cedi Billions 120,000.00 100,000.00 80,000.00 60,000.00 40,000.00 20,000.00 0.00 1999 2000 2001 2002 2003 2004 14 (Approx. US$12 billion) 97,437 3,205 3,634 3,897 6,184 12,604 % Return 2001 250% 200% 150% 100% 50% 0% UNIL BAT PZ Top Five Companies 2001 - 2004 140% 120% 100% 80% 99% 86% 88% % Return 2002 124% 109% 197% 200% 153% 44% 57% 60% 40% 20% ALW PAF 0% MLC FML PZ UNIL GCB 500% 450% 400% 350% 300% 250% 200% 150% 100% 50% 0% % Return 2003 419% 319% 233% 430% 438% PBC HFC BAT SGSSB GGL 450% 400% 350% 300% 250% 200% 150% 100% 50% 0% 426% % Return 2004 343% 281% 193% 218% CFAO TBL EIC MLC FML 15 Risk-Return Relationship • Risk adjusted returns are fast improving in Africa largely due to relatively lower inflation and improving exchange rate stability • The Africa region registered relatively weak risk adjusted returns over the 1994-1995 period but the region has outperformed others over the more recent period of 2001-2005 16 Risk Adjusted Returns Africa Average MSCI EM Europe USD MSCI Latam USD MSCI AC ASIA NIKKEI FTSE MSCI EU USD MSCI World Free MSCI NA USD S&P 500 -20 -10 0 10 20 30 40 50 60 70 Dec 2001- June 2005 Jan 1994 - June 2005 Returns in USD/Volatility of Monthly Returns 17 Risk-Return Relationship • A very weak (statistically insignificant) and elastic relationship between risk and return is observable in the major African markets taken as a whole 18 Risk Return Relationship (Africa Excluding Ke 5 Egypt Botsw an a 4 1994 to 2005 3 2 Moroc co 1 S.Af rica 0 -1 .04 M'ritius Ghana Nambia Nigeria Kenya excluded because it’s an outlier Rsq = 0 .0336 .07 .08 .09 .10 .05 .06 Volatility (Dollar Returns) 19 Diversification Potential • The correlation of returns among African markets are very low offering good diversification potential for investors • African markets correlate poorly with markets outside the continent due to the low level of integration of the African economy into the global economy. This creates good diversification potential 20 Diversification Potential Table: Correlation of monthly Index returns 21 Developments • There are no capital controls for foreign investors in all the major African markets. Repatriation of returns and principal are guaranteed • Several markets do not apply capital gains tax, e.g. Ghana • Several markets allow 100% foreign ownership • Improving regulatory framework in several markets • Fairly good regulatory structure in the key African markets • Africa’s economic outlook has improved in recent years given strong commodity prices, debt relief, improving economic management, growing democracies etc 22 Developments • Growing local institutional investor base via the gradual emergence of collective investment schemes promises to help improve liquidity • Contagion risk is low providing massive portfolio diversification benefits. This derives from the poor correlation of returns among African markets on one hand and between African markets and other markets on the other hand. 23 Market Risks • Markets are relatively small • Markets are relatively not liquid and thus suitable to only very patient long-term investors • Foreign ownership restrictions in some markets • Perceptions of high foreign exchange rate risk especially in the past • Perceptions of high political risk • Poor and inadequate information flow 24 Risk issues • Inadequate legal and governance structures • Mechanical issues of markets – trading and settlement systems • The mentality of control by governments • Inadequate participation of domestic economies 25 Outlook • Africa’s economic outlook is looking brighter than it did a decade ago • Political risk is falling significantly in several countries • Cheap valuations will continue to drive performance over the long-term • Plans are afoot to create a common trading platform in Johannesburg for all listed companies in Africa to help improve liquidity and visibility • Ongoing regulatory improvements will spur the emergence and growth of local institutional investors 26 Outlook • As GDP growth rates increase the markets become critical for poverty alleviation as opportunities for wealth creation and capital formation (expectation of >8% GDP growth rates) • Need to raise savings levels in the continent • Liquidity still an issue (transmission of liquidity to economic growth occurs thru savings, investment and productivity. Countries with liquid capital markets have faster rates of capital accumulation and general productivity gains . 27 Opportunities • Significant spend in Oil and Gas in the next five years (approximately up to US$40 b in West Africa and up to US$30 b in North Africa – exit strategy for core investors • Privatization opportunities still exist in most countries, especially in the utilities and telecoms • Africa’s stock exchanges will serve as the dominant exit strategy for most VC and PE investors 28