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Lecture at Cornell University

Connecting Investors to Africa Via
the Democratization of Capital in Africa

Cornell University
September 28, 2006

Summary of lecture given by Thomas Mims, Emerging Africa Ltd CEO

Africa receives approximately five percent of the foreign portfolio investment into developing countries. This in light of the fact that for the year 2005, Africa (excluding South Africa) out performed the rest of the world’s stock markets as well as Morgan Stanley’s World and Emerging Markets (MSCIAC)). The over-achieving yet undervalued publicly traded companies of Africa are waiting to be discovered by US and global investors. The African stock market scenario is poised for a high rate of expansion. Presently there are over 1800 stocks listed on the African stock exchanges.

Profile of African Stock Markets (year end 2005)


Capitalization (US$bn)

Listed Companies

South Africa



























Cote d' Ivoire
























Research shows that economies fare best where capital is inexpensive, plentiful and fairly allocated. The “Democratization of Capital” is a powerful force that feeds upon itself as healthier economies attract more capital by which to grow healthier. The greater the access to capital markets, the greater the chance that African entrepreneurs will get their ideas financed, thereby creating jobs and higher levels of prosperity.

With a fraction of the size, and less than half the population, raw materials and natural resources of Africa, the US has a stock market capitalization 50 times greater than that of African stocks. There are scores of US companies, each that have a market value that exceeds total African market value. Cisco, Microsoft, Intel and GE are examples.

Furthermore, the value of US stocks greatly exceeds US GDP, while the value of African stocks is appreciably less than the aggregate GDP for the continent as a whole.

The extremely low liquidity levels of African stock markets is one of the major barriers to market expansion. 60% of the African stock exchanges have an annual turnover ratio of less than 10%. While Africa trades five billion shares a year, the New York Stock Exchange and NASDAQ together sometimes trade that many shares in one day.

Investors-large and small-seeking to engage with the African stock markets have discovered that access to reliable information and data from the capital markets of Africa is quite limited.

The Solution:

To improve the prospects for growth and maturation of the African capital markets there will be a need for:

lower costs of transacting,

more liquidity and depth,

presentation of good transparency,

less fragmentation of markets,

improved access to information and data,

greater initiative from financial intermediaries.


This will be necessary to create and introduce more products such as American Depositary Receipts (ADRs), and qualifying investments under SEC Rule 144 for both greater accessibility and capital raising programs to support privatizations as well as growth in listed stocks throughout Africa.

Globally, trading volume, along with the number of newly listed stocks is increasing. The number of investors is growing rapidly, and day trading has added a new layer to the industry. Satisfying the demands of those investors for new products leads almost inevitably to Africa, where promising companies have been overlooked. Numerous enterprises, including Small & Medium Enterprises (SMEs) stand poised to become new listings on the African stock markets.

One benefit of simplifying the investment in Africa process for US and other global investors will be to funnel money from the richest nations to African businesses that represent new opportunities. US based pension funds with mandates for socially conscious investing cannot invest in small cap foreign companies due to ERISA restrictions. However, these funds are allowed to invest in ADRs. A small fraction of the trillions of dollars in US pension funds, if directed to African ADRs and ADR funds; would have a significant and positive impact on the continent. For example, when capital markets of Africa become accessible; African enterprises seeking to benefit from duty free exports to the US under the AGOA Act will have more opportunities to raise capital in order to build production infrastructure.

The African markets have not lured the so-called hot money, or highly volatile short-term funds which many analysts have blamed for exaggerating the peaks and troughs of equity investment. Rather, many of Africa’s stocks are in the hands of institutions that follow a buy-and-hold strategy. This group includes governments maintaining minority holdings and those involved in management. While such investors offer some stability to share prices, the down side is that the long-term view that forms this type of investor’s decisions has exacerbated already low levels of liquidity. The extremely low liquidity levels of African stock exchanges are often cited as the major barrier to expansion. On the plus side, these types of investors can also act as a buffer against share price volatility.

Several factors and recent developments, underscore the need for, and the likely success of, a consolidated stock market for Africa. They include:

Technology’s impact on the securities and many other industries (especially the Internet)

The trend towards global consolidation of mature securities exchanges

The high rate of return on foreign direct investment in Africa

Inefficiencies of the current African Capital Markets

The vast potential of the resource rich continent

Technologically, online brokerage has substantially influenced the way that the securities exchange industry does business. The number of electronic exchanges and Electronic Communication Networks (ECNs) and Trading Facilities are growing rapidly. Global markets have become more efficient as a result. One only needs to look at the NASDAQ market for an example of how technology can advance the capital markets. At its inception, NASDAQ (National Association of Securities Dealers Automatic Quotation) was seen as having limited prospects as compared to the York Stock Exchange. Today, NASDAQ trades as much as twice the volume of the NYSE. High cost legacy systems for stock trading are being replaced by low cost web-based systems with proven technology, thereby lowering barriers to the creation of new security exchanges.

Africa, once it implements an efficient capital market structure will see a much higher rate of capital flow into the region, the number of transactions will grow. A “one-stop -shop” for all global investors to access data and information, buy and sell all African shares with a sense of reliability: will remove a major barrier to higher levels of African stock market liquidity and increase transaction volume significantly. The result will be a vitalization of the nascent African stock markets and an opportunity for the countries of Africa, which have no stock markets to have immediate access to global investors. Capital is always eager for new opportunities, particularly those that produce the most attractive returns / yields.


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