What investors want (in the context of African Capital Markets)

United Nations Economic Commission for Africa-Worksop on African Capital Markets

N. Justin Chinyanta, Loita Capital Partners International

Johannesburg,
South Africa

Brief Introduction

• Introduction to Loita Capital Partners;

• Capital Markets involvement on a foundation basis in markets considered exotic e.g. MTN Commercial paper issue in Rwanda on private placement basis, PTA Bank bond issues in Malawi (public), Uganda (public), and Zambia (public), Press Corporation commercial paper issue in Malawi (Press is the largest corporation in that market), and presently some pipeline issues in Angola and Madagascar.

• Will focus on what matters to investors in African capital markets and the pre-requisites for efficient financial / capital markets.

The African capital market Place

• Comments are generally exclusive of South Africa

• Three classes of countries, namely (1) non stock market countries (2) countries with stock markets, but which are closed to foreigners and (3) countries with open stock markets

• Market products are: 1) equities 2) Government debt instruments (3) private debt instruments;

• There is a general consensus by the market regulators and players, that a regional approach is warranted to ensure both liquidity and depth.

Market Characteristics

• tight liquidity

• few secondary market options (esp. for financial instruments)

• absence of market makers (investment banks, underwriters)

• short term view

• "crowding out" effect by government instruments and borrowing

• Government owned development banks and mortgage institutions as the principal source of long term domestic capital

• Government directed investment programs

• Lack of capital markets (and instruments) knowledge amongst players, intermediaries and regulators

• Generally bureaucratic regulatory environments (given time sensitive nature of issues)

• Absence of regulatory framework for certain class of instruments (e.g. debt securitisations)

• Lack of quality domestic private issuers

• Small number of portfolio options: property, deposits, government securities, equities

• Lack of autonomy of investment managers

Investors

• Can be grouped into domestic and international cetegories

• Risk appetite and issues differ depend on the class of investor

• Interestingly in the capital markets arena, domestic investors tend to take comfort from foreign investors

• Features of local investors include:

• pension fund institutions

• insurance companies

• banks

• co-operative societies

• note: very few high net-worth investors

• Local investors tend to emphasise:

• capital guarantees

• issuer profile

• credit enhancement

• liquidity

• hedge vs return (foreign currency vs local currency returns)

• prudential guidelines

• Foreign investors comprise the usual international institutional players, primarily fund managers and in some instances MDBs (multilateral development banks such as the ADB, EADB etc)

• Foreign fund managers tend to emphasise:

  • a short-term view ("hot money")

  • higher risk profile dictated by higher return

  • Convertibility and or lack of exchange controls

  • Transparency both in the regulatory environment and accounting standards and practices

What investors want:

Investors are generally risk averse and are particularly sensitive to market volatility. In Africa's case, the challenge is to over-ride infra-structural difficulties, negative investor perceptions and small size of markets before normal investor appetite issues are addressed. These issues include:

• Return

• Political stability and general rule of law

• Macro-economic stability (exchange rates, interest rates, government fiscal discipline)

• Ability to move capital freely in and out (limited or non-existent exchange controls)

• Market size, liquidity and depth

• Clear regulatory guidelines or, in the absence of instrument-specific guidelines, public-private sector cooperation in their establishment;

• Credit ratings and or transparent benchmarking for pricing of issues

• Quality issuers

• Market information in a structured and transparent fashion

• Existence of market makers who are able to bring together willing buyers and willing sellers, a knowledgeable base of primary and secondary dealers, including investment banks, stockbrokers, discount houses

• Products which take into account liquidity surges and troughs [most done on programme basis]

• Rapid listing procedures and instrument registry; incentives to list [LuSE incentive scheme]

• Transparent market prices and practices

• Pro-active asset managers and stock exchange managers

• Capital markets authority as central regulator and coordinator for the introduction of new instruments.

• In summary, "SUCCESS BREEDS SUCCESS" and Investors do not want to re-invent the wheel.