The emergence of a thriving equity market is often the final step in a long process of economic development for many countries.
It represents the point at which domestic and international investors feel comfortable enough with all the companies, governments, and players involved in that market that sinking large amounts of capital into an emerging economy via stock purchases is not seen as inordinately risky, but as good business.
The five members of the East African Community – Kenya, Uganda, Tanzania, Rwanda, and Burundi – are gambling that their economies are now strong and open enough to risk integrating their equity markets, offering up opportunities to both domestic and international investors. If plans in the works go forward, say experts, these five countries will have a single capital market with an estimated value of $31 billion in about two years.
Equity market integration would represent the culmination of plans set in motion in 2007 when members of the East African Community signed a protocol creating a common market between them. The protocol came into effect in 2010 when all five members ratified the treaty, which in addition to the creation of a common capital market also calls for the free flow of goods, labor, and services between all five countries.
The integration of East Africa’s individual stock markets will create the third-largest such regional market, after the Western African regional stock market (BRVM) based in Abidjan, Ivory Coast, and the Central African stock exchange (BVMAC) based in Libreville, Gabon. It also comes after East Africa has been enriched by a decade of economic growth where the region’s economy averaged a 6 percent increase per year, sparked by the boom in global commodity prices and China’s expansion into Africa.
East Africa’s capital market integration comes at a fortuitous time as the continent’s stock markets have been on fire of late. Both the Nigerian and Kenyan stock markets, for instance, are up by more than 50 percent over the past year, driven by years of economic growth and projections for more to come. By 2020 it is believed that the majority of Africans will have enough income to begin to spend beyond basic needs – forming a foundation for the emergence of a class of more upscale consumers of the type that has long driven Western economies.
Traditionally, Western investors putting capital into Africa have done so through the traditional resource-extraction industries, which have long dominated Sub-Saharan Africa’s economies. Oil, agriculture, and mining companies were therefore the stocks to watch in Africa. That, however, is changing as Africans get richer and their economies both expand and integrate – meaning manufacturing, banking, retail, transport, and services are the new hot African sectors to watch.
The recent move by Chinese manufacturers to set up operations in Ethiopia, is a case in point. Since Africa is expected to have a working-age population larger than China’s in about 30 years, the stage is set for a larger industrial boom in the future as low-cost manufacturers transition out of East Asia. Already, Africans’ rising incomes and slowly-improving infrastructure have made the food-and-beverage sector, from restaurant chains to food processors, attractive investments.
To take advantage of Africa’s current and coming boom, Western investors can buy into any of a number of investment funds and ETFs that have increased their exposure to Africa. For those willing to take a full plunge, iShares MSCI South Africa Index has been around for 10 years and has 100 percent exposure to Africa, while the Nile Pan African fund has exceptional exposure to emergent Africa outside of oil and mining. Other funds with significant exposure to Africa include the newly-launched iShares MSCI Frontier 100 Index Fund and the Market Vectors Africa Index ETF.
