Africa hosts a great cluster of emerging and frontier markets. Brian Bollen looks at the changes abound from Ghana to Cameroon, and what the path ahead looks like for its asset servicing
Africa remains a collection of emerging and frontier markets, but continues to have strong attractions for investors, say those who know the continent intimately. This of course drives the demand for custody and related services, a market which is, broadly speaking, settled, says Michelle Swanepoel, managing director and regional head of financing and securities services Africa at Standard Chartered Bank.
“There is not a great deal of movement in terms of banks wanting to set up in what is a capital-intensive activity,” she comments. “It is not necessarily economically viable to invest the required amounts in technology and staff in modestly-sized mature markets. Where we see change taking place is in the buying behaviour of larger global inbound investors, and a withdrawal of regional players. There is a trend towards consolidation in favour of players who can serve several markets.”
With the entrance of Sandton, South Africa-based Granite CSD into the market, competition — which is fundamental to the growth story of the market and region — is thought likely to ultimately benefit the end investor from a pricing, innovation and quality-of-service point of view. Granite is an alternative central securities depository (CSD) which was licensed in May 2017 for bond and money market securities in South Africa and has high ambitions to become a depository for equities and develop custody and collateral capabilities. Its arrival on the scene as a competitor to Strate made South Africa the first country on the continent to have two CSDs servicing the same markets, notes Leon Rossouw, Granite’s CEO. “Nigeria was not far behind,” he adds. “We are in advanced discussions with other country CSDs to collaborate and seek efficient cost-effective solutions.”
Against this evolving backdrop, Standard Chartered Bank and Standard Bank are currently the primary ports of call for international investors looking for a reliable gateway tended by a familiar name with broad multi-regional reach. Standard Chartered provides direct custody in 11 African countries where it has a bricks and mortar presence. Societe Generale Securities Services remains an active player, providing custody services from five locations, in North Africa, Western Africa and Central Africa. “We are also actively monitoring new frontiers in Eastern, Western and Central Africa,” affirms Jean-François Marchand, Societe Generale Securities Services (SGSS) international country supervisor for Africa.
In frontier markets it is vital that investors and intermediaries select local sub-custodians which are well-risk managed and sufficiently capitalised, say Marchand and Duncan Smith, senior sales and relationship manager at SGSS, in a mini-essay on the continent. Published in late autumn 2021, this examines the principal developments unfolding across the major African markets together and a number of the challenges they pose to investors. In a handful of markets, local brokers are sometimes the only custody option available to foreign investors; the recent trend for portfolios domiciled in Mauritius to be moved to a more regulated environment in Luxembourg has underlined the need for sub-custodians to have the backing of a strong balance sheet.
“The securities services landscape in South Africa is highly competitive and dominated by the local banks that provide a comprehensive range of securities services from domestic and global custody to securities lending and derivatives clearing,” says Mark Kerns, CEO at Adapa Advisory. Between 75 to 80 per cent of domestic custody market share lies with the local banks.
Standard Bank is universally recognised as a major sub-custodian but also supports end-investors such as asset managers. South Africa-based ABSA (previously Barclays Africa Group) has recently returned to what is becoming an increasingly complex custody market. Other regional players include Rand Merchant Bank.
Kern expands: “Certain markets will be covered by a hub, but where there is scale, as with, say, Nigeria and Kenya, the service will be direct. In terms of supporting international investment for domestic clients, none of the domestic providers has a global custody capability.”
Swanepoel adds: “Standard Chartered offers an international custody hub solution from Mauritius giving access to our 40 footprint markets across Africa, the Middle East and Asia and a further 60+ non footprint.”
Separate entities
While Granite and others look determinedly to the future, questions of market liquidity and foreign exchange restrictions remain an issue here in the present, while environmental, social and governance, cryptocurrencies and digital assets are coming to the fore. No feature dedicated to the state of the African custody market can take place in a vacuum. Within seconds of the start of any conversation on the subject, the state of play in the underlying financial markets rears its head and almost immediately begins to dominate the discussion. The mantra stating: “Africa is not a single market” quickly becomes a familiar one, along with: “each of Africa’s markets is at a different stage of development”.
A clear example is provided by the core content of the first edition of Standard Chartered Bank’s Africa, Middle East and Pakistan Securities Services Market Information Newsletter for 2022 (we are indebted to Standard Chartered and Societe Generale Securities Services for authorising the mining of their work). Swanepoel begins her contribution to the Standard Chartered quarterly market insights report by noting that 2021 was an eventful year in Africa. “Despite the continued impact that COVID-19 has had on the region, the market advocacy agenda has continued to gain traction,” she writes.
“Green shoots in offshore investor returns were seen most notably in Uganda and Zambia and we are hopeful that in 2022 markets that have seen an exit of offshore investment start to see a return of risk appetite, which will aid some of the stretched foreign currency scenarios that have been experienced this year. Domestic market investment from local investors has delivered well and Africa has again demonstrated her resilience in 2021. It is evident that resilience and perseverance will again be the name of the game as we enter 2022.
“If we reflect on the achievements made in capital market development, in both the trading and post-trade environments, it is evident that investment continues with a particular drive to continue the automated accessibility to execute trades, ensure efficient market processing and a drive to increase investment.”
In the report, Swanepoel notes that West Africa saw the Bourse Regionale des Valeurs Mobilieres (BRVM) Regional Stock Exchange move from centralised electronic listing (order entry) to decentralised electronic listing (order entry by brokers). This has resulted in the transmission of orders from devices such as mobile phones and electronic tablets to be routed to the BRVM trading system. The objective is for all the brokers in West African Economic and Monetary Union to be able to offer online stock exchange services to their clients.
In Ghana, the Capital Market Master Plan was launched, with the aim of improving the diversity of investment products and liquidity, increasing the investor base, strengthening infrastructure and improving market services as part of a wider effort to improve regulatory, enforcement and market confidence.
In Nigeria, good collaboration was seen with the CSD in looking at how the Africa agenda can be presented at the International Securities Services Association. There is also increased awareness and appreciation of the need to move to a single depository account structure. New beneficial ownership rules were raised successfully with the Securities and Exchange Commission of Nigeria to avoid additional disclosure requirements by investors.
The Uganda Securities Exchange has continued with the digitisation agenda with measurable success; at the start of 2021, account opening was digitised for retail and institutional investors.
In Kenya, the outcome of VAT and excise tax applicability on “exported services” was finalised, resulting in the exemption of these taxes for foreign investors, an outcome for which Standard Chartered has been lobbying for several years.
Kenya also saw the adoption of SWIFT MT535 usage by the Central Depository and Settlement Corporation for the automated reconciliation of securities holdings and the adoption of hybrid meetings for annual general meetings and electronic voting by shareholders. Many companies have amended their memos and articles of association to adopt this.
Botswana’s Non-Bank Financial Institutions Regulatory Authority (NBFIRA) approved the concept of “off-market transactions” to be approved by the Botswana Stock Exchange, with effect from 1 May 2021.
In South Africa, at the CSD level, Strate launched stakeholder engagements in respect of overhauling their fee and billing models. “Whilst the process is expected to take two to three years to come to fruition, we see this as a positive step in simplifying and harmonising fees and billing across asset classes,” says Standard Chartered’s Swanepoel. From a technology perspective, the CSD has begun “experimenting” with and will pilot an application programming interface for securities lending and borrowing early in 2022.
Exchanges
At an exchange level, competition to the main exchange, the Johannesburg Stock Exchange (JSE), is slowly starting to gain momentum. A2X Markets added several new dual listings to its platform during the course of the 2021, whilst 4Africa Exchange, which was previously a closed market for restricted share classes, has re-branded itself as the Cape Town Stock Exchange and moved to an open market model.
However, neither of the newer exchanges is yet in any position to compete with the scale of the JSE.
The JSE has embarked on several initiatives in the wake of delistings and fewer new listings over the last 15 to 20 years, Swanepoel observes. These initiatives include making listing requirements less onerous and less expensive in order to encourage new listings, and also maintain and retain existing listings.
The JSE has also embarked on several diversification journeys in which it has acquired a small custodian, an issuer services business/transfer agent and taken a majority stake in a financial technology business, which will assist it in tapping into private placements.
The path ahead
While stressing that custodians play no part in investment management directly, or buffer the associated risk, Swanepoel suggests that Africa still represents an alpha opportunity for offshore investors as they begin to focus again on returns after a prolonged flight to safety.
“Africa as a continent is still on a growth path,” she says. “Around 75 per cent of the population are under 35 and obsessed with mobile connectivity. There is also a focus on growth for pension schemes, which have traditionally had very low penetration across Africa.”
Taking up the commentary, Marchand and Smith of SGSS also believe that African markets are in recovery mode, despite the prevailing economic uncertainty being caused by COVID-19. They state in their aforementioned essay that persistently low and negative interest rates — along with overpriced equities — in the major developed markets are forcing institutional investors to rethink their portfolio compositions — with greater prominence now being placed on higher-yielding emerging and frontier economies.
After suffering from a COVID-19-induced contraction of 2.1 per cent last year, real gross domestic product in Africa is projected to increase by 3.4 per cent in 2021. The economic rebound and the introduction of positive market reforms in a number of countries is helping convince investors to bolster their Africa-wide exposures.
Now sitting on record amounts of dry powder, the private capital industry — including private equity and infrastructure — is increasingly scoping out investment opportunities across Africa. With the abundance of highly successful African financial technology companies — especially in the online payments world — it is expected that private equity’s interest in this dynamic sector will continue to increase well into 2021/22. Meanwhile, infrastructure investment in Africa remains robust, with managers earmarking funds for traditional and renewable energy projects.
Although countries such as South Africa, Kenya and Nigeria have historically been among the most heavily-traded African markets by foreign equity investors, momentum is gathering elsewhere too, most notably in Cameroon where new regulations have been enacted to encourage further initial public offering activity. Trading is also being fuelled by the growing consolidation between market infrastructures across different countries.
The establishment of regional infrastructures allows for the pooling of liquidity into a single location, instead of spreading it too thinly across multiple, smaller markets. For instance, the Central African Economic and Monetary Community countries — comprising Cameroon, Central African Republic, Chad, Gabon, Equatorial Guinea and the Republic of Congo — all have the Central African Stock Exchange (more commonly known as BVMAC) which has helped drive liquidity into these markets. Such consolidation can help attract international players with SGSS opening up a branch in Cameroon in 2020 after BVMAC’s merger with the Douala Stock Exchange.
Other initiatives aimed at attracting liquidity into Africa’s famously fragmented equity markets include the Africa Exchange Linkages Programme, a cross-border trading and settlement link involving the stock exchanges of Morocco, Egypt, South Africa, Kenya, Mauritius, Nigeria and BRVM.
Such programmes are likely to stimulate global investor activity across these markets post-pandemic, notes SGSS’ Smith.
