Taking risk out of the sub-Saharan Africa markets

International investors no longer see any unusual investment risks, in sub-Saharan Africa, according to Mark Kerns, Standard Bank Group's African Head of Investor Services. As a result, increased investor interest in the region and the desire to develop more liquid local capital markets has seen the reform of securities markets across the region.

Overall international investment allocations to Africa are still relatively low - Mr Kerns explains that if international pension funds invested even 1% of their assets under management, it would overwhelm the region's exchanges. However, from that low base the growth has been exponential over the past five years.

Standard Bank Group's Investor Services is the market leader in the region with custody and related services in 15 countries across the continent. As sub-Saharan Africa becomes a much sought after frontier market investment destination, the requirements in terms of administering those investments are growing rapidly.

Mr Kerns says, "Our strategy is to have the broadest market coverage and deepest product capability."

The two go hand in hand: the market capitalisation and liquidity in most markets is small, but it is players like Standard Bank Group that are bringing new products like securities lending to the market, which will in turn boost liquidity and the range of investible products.

Mr Kerns describes the full product offering of Investors Services as: custody; trusteeship; securities lending; derivatives clearing; and investment administration (including accounting, valuations, compliance and performance measurement).

"In South Africa, each of these services is available, but each country in the rest of Africa is at a different stage of maturity and our offering in each country parallels that. For instance, Nigeria is the closest to a full offering, and in the second quarter of 2013 Standard Bank will introduce securities lending and borrowing, as we believe there is significant growth potential in this market," says Mr Kerns.

Kenya and Zimbabwe are the next most mature and Standard Bank Group offers trusteeship in those markets, while investment administration is offered only "in selected countries" adds Mr Kerns.

However, outside South Africa, no market yet has the demand or regulations to justify the full suite of services. Nonetheless, Mr Kerns believes it is only a matter of time as some of these markets are growing aggressively (albeit off a low base after they were heavily sold off post 2008).

Nigeria's stock exchange rose 40% last year and has already risen 25.4% so far this year. Mr Kerns says Nigeria is the major focus of interest for investors as the government has lifted a number of restrictions on foreign ownership of securities and buying government treasury bills, thereby stimulating liquidity and demand. In addition, a number of other markets such as Kenya and Zimbabwe are performing at no less a pace.

"The growth of our investor services business in sub-Saharan Africa has been little short of extraordinary, underpinned by strong demand. All the fundamentals for a booming market are gradually being put in place in individual countries: pension fund systems and insurance products are evolving, each with investment needs. The number of African sovereign bond issues is growing almost monthly with each being highly oversubscribed by international investors. Prospects for more countries coming to market and existing countries making more issues are highly encouraging."

There has been an increase in the number of independent depositories and it is fair to say that 70% of the markets in which Standard Bank operates has a depositor and all have some regulator similar to South Africa's Financial Services Board (FSB). Each has put in place the fundamental infrastructure and is poised to expand, which in turn has led to a switch in perceptions as to the credit risk associated with these exchanges.

Mr Kerns says, "There is only one direction these markets are going and that's up. These countries are increasingly associated in the investor perception with political and social stability, combined with good GDP (gross domestic product) growth. That in turn is typically associated with more listings and government debt to support the continent-wide infrastructure roll-out.

"International investors are looking for yield, and they clearly believe it is safe to invest in these frontier markets bearing in mind the amounts they invest in Africa are relatively insignificant compared to their total assets under management."

African markets have to be seen as in its formative stages, one that will grow exponentially for some years. The next step is more listings and variety of products such as exchange-traded products (ETFs) and pan-Africa unit trusts, of which there are already a number. These are mostly listed on the JSE, but there is a trend for them to list in other markets, with the first, NewGold, having already done so in Ghana. The Ghanaian regulator had set a goal of 50 listed counters and this was exceeded ahead of schedule.

This growth may be faster than most people suspect. Kerns believes the rest-of-Africa could outgrow the South African market within five short years (in revenue terms if not assets).

"The achievement of double-digit growth in sub-Saharan Africa is not unrealistic, outpacing South Africa and this will increasingly drive international investor flows to where the return is - north of our border."

With USD300 billion in assets under administration Standard Bank is the market leader by some margin (the next biggest is USD50 billion), giving it the edge in these markets.

"Investor Services is all about scale; lowering your unit costs and increasing efficiency. Standard Bank lowers those costs by running a common platform in each country, and these economies of scale enable us to establish centres of excellence and to recruit the best people."

The South African influence is readily apparent in Southern Africa, with approximately 70% of the liquidity on the Namibian exchange being SA-related, and many South African corporates rapidly establishing a presence in Zimbabwe. The latter country is attracting a disproportionate amount of interest, claims Kerns.

"Most of the risks associated with investing in Africa are ones that international investors fully understand, so one cannot say there are particular risks relating to Africa. However, holding back even greater demand is the issue of liquidity - there are not enough assets to satisfy demand." "The opportunity exists for South Africans to participate in building new products and in building in-country client bases," says Mr Kerns.

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