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Introduction to special issue on African equity markets
Article Type: Guest editorial From: Managerial Finance, Volume 37, Issue 3
Recent years have witnessed a significant increase in interest in African stock markets. In particular, over the last decade, stock exchanges in this continent have experienced a rise in market capitalisation, a growth in trading volume and an increase in the number of listed companies (Standard & Poor’s, 2009). In addition, share trading on a lot of these stock exchanges has been automated and the settlement period for share transactions has been reduced. Furthermore, laws which discouraged foreign investors from purchasing equity stakes in local African companies have been reformed in many countries in this continent (Alile, 1996) and regulations have been introduced to strengthen share ownership rights and avoid disputes over share transactions. As a result of these changes, interest in equity ownership among local African investors has grown. Indeed, new shareholder associations have sprung up in several countries while existing associations have grown in size (Amao and Amaeshi, 2007). However, very little is known about the current performances of these exchanges following the changes that have taken place. The current special issue of Managerial Finance attempts to fill this gap.
Interest in the whole region of Africa has increased among international investors who specialise in emerging markets. For example, a recent interview by Mark Mobius who founded Franklin Templeton’s first emerging markets fund (Fernando, 2009) highlighted the potential of African equity markets for consideration by international investors. As the economies of more established emerging markets such as Singapore have become developed, their diversification potential for international investors has declined; the correlation between the returns of equities in these countries with their counterparts in developed markets has risen (Divecha et al., 1992) thereby reducing any diversification benefit that might have been available. While the search for alternative emerging markets initially focussed on Central and Eastern Europe among other locations, even here the diversification potential may be limited by the convergence of these countries’ economies with those of other EU countries (Middleton et al., 2007). Thus, attention has focussed on the African continent which has, until recently, been ignored by international investors.
The growth of interest in Africa is not surprising given the natural resources which many countries in the region are endowed with (Mobius, 2010). The activities of extractive industries, in general, and mining in particular are disproportionately located in Africa. Investors who wish to invest in these extractive industries have also presumably turned their attention to Africa – especially as national governments in the region have curtailed the activities of foreign multi-national corporations from developed countries in favour of domestically quoted companies.
Global financial institutions such as the World Bank and the International Monetary Fund have also helped to raise the profile of African equity markets among international investors. In particular, they have sought to foster the economic development of African countries and relieve poverty in the region with financial aid. This aid has often been linked with economic reforms and national governments improving access for foreign investors to their countries’ equity markets (Bekaert et al., 2003). As a result, the financial climate within African countries has become more favourable for equity investment. Further, the supply of such investments for foreign as well as local investors has grown as national governments have been encouraged to privatise large state-owned enterprises.
Because of all of these changes, it seems an opportune time to examine the recent performance of African equity markets. A small number of previous studies have been conducted in this area (Olowe, 1999) but the market has changed so much in recent years that a fresh investigation is required. Further, the few studies that have been conducted have tended to use small samples of shares and relatively simple tests on a short time series of data. More up-to-date analyses on a larger sample of markets for a longer time span with a greater battery of tests might yield different results. Further, more recent analyses may offer rich insights when compared with the findings that have been gleamed from past studies.
The current special issue contains a number of papers which provide these analyses. They consider issues such as the efficiency of African equity markets (Ntim et al., 2011), the volatility of returns in these markets (McMillan and Thupayagale, 2011), linkages between the different markets in the African region (Agyei-Ampomah, 2011), the impact of market microstructure and liquidity on a newly established African market (Dia and Pouget, 2011) and the distributions of returns for African equities (Tolikas, 2011). Some focus on a single country (e.g. Campbell and Ohuocha’s, 2011 study of Nigeria) while others investigate markets from across the whole continent (Ntim et al., 2011). All employ a range of sophisticated tests and study up-to-date data. The findings suggest that African equity markets are still relatively segmented and characterised by periods of volatility with fairly sizeable share price changes. However, the investigations in this special issue also highlight the potential for increased efficiency and portfolio diversification from equity investment in the African continent. They also suggest that the improved data that is now available for African markets can offer insights which challenge results from earlier studies.
Suzanne Fifield, David M. PowerGuest Editors
While African stock markets grew dramatically until 2007, during 2008 and 2009, market capitalisation in $US declined in a number of the exchanges (Standard & Poor’s, 2009).
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