African Exchange Dilemma

It has been a truism among Africanists and saavy emerging market investors that the 23 African countries with stock exchanges often produce higher returns that the world average, but truisms are sometimes doubted for lack of widely examined evidence confirming them. We now have proof that this particular truism is real.

The International Finance Corporation has rated the Nigerian Stock Exchange as the best is the world in terms of returns. The Nigerian exchange thus beat out its fellow emerging market exchanges, such as those in Johannesburg (South Africa), Istanbul (Turkey), Bombay (India), Sao Paolo (Brazil) and Dubai (United Arab Emirates). In fact, the rate of return on investments on the Nigerian exchange beat out the New York Stock Exchange and the London Stock Exchange. Nevertheless, Nigeria still is not the top destination for investor dollars.

The reasons are outlined in a survey whose results were made available by THISDAY, the Nigerian newspaper. According to the survey, fewer than four in ten investors said that surveillance and enforcement of regulation on the Nigerian exchange were fair, and a similar number found the regulatory and tax regime to be fair as well. Three-quarters listed the exchange as less liquid and more shallow than desirable. The Nigerian exchange is nearly 20 times smaller than its emerging market peers, and the value per listed company is 3.5 times smaller than the emerging peer average.

Nigeria is a vibrant, but still stunted economy. Its regulations on the stock exchange can be remedied, and greater investment will help its companies grow. Clearly, there is potential on the African exchanges – not only Nigeria, but also in leaders such as South Africa, Egypt, Ghana and Kenya. The African exchanges now have a chance to grow and avoid the mistakes made by Western investors who have brought down the global economy with their greed. However, such growth must be accompanied by transparent, effective management. That is a challenge Africa can and must meet.