East Africa: EA Targets Pension Funds to Spur Capital Markets
The lack of engagement in local stock markets by institutional investors is one of the reasons why the stock markets in Africa are not as vibrant.
The third edition of the Africa Financial Markets Index released last Wednesday says that that although capital markets in Africa are projecting a collective progression towards a more robust and investment-supporting environment, the participation of local institutional investors remains subdued.
Of the 20 stock markets surveyed in the index, only South Africa, Morocco, Nigeria, Botswana and Namibia have deeper presence of pension funds that hold huge resources and can play a vital role in the development of capital markets.
Across Africa, declining share prices have made small and retail investors exit bourses in droves, leaving the exchanges in the hands of foreign investors.
With a majority of stockmarkets in Africa feeling the effects of retail investors flight, the reality is that local institutional investors such as pension funds are avoiding stock markets because there are no attractive products.
For many countries including Kenya, Tanzania, Uganda and Rwanda, limited product availability at the stock markets has constrained pension funds to investing in government securities.
“Building pension fund assets through innovative and inclusive schemes can help spur demand for a wider range of financial products and lead to greater market activity,” reads the index by Absa Group.
That pension funds in East Africa are giving the stock market a wide berth is evident considering that although Kenya’s pension assets rose by 17 per cent to $10.5 billion in 2018, government securities account for 39 per cent of pension assets followed by real estate at 20 per cent.
Fund managers in Kenya attribute the pension funds affinity to fixed incomes to the fragmentation of assets in many small schemes, a broken relationship between trustees and managers and limited capacity.
In Uganda, government securities account for 75 per cent with equities accounting for only 14 per cent.
The situation was not any different in Tanzania and Rwanda considering the countries had an average score of 22 per cent on the capacity of local investors.
This compares badly to Namibia where 56 per cent of pension fund assets are invested in equities and only 22 per cent in fixed income and Morocco has a large ratio of pension assets to listed securities at 52 per cent.
“The lack of knowledge and expertise by trustees and other asset owners hinders the development of new financial products by reducing their demand for more sophisticated assets and strategies to diversify returns,” said Jeff Gable, head of research at Absa Group.
In Kenya, the push for pension funds to diversify their asset classes has resulted in the formation of the Kenya Pension Fund Consortium that targets to pool $50 million to invest in infrastructure projects, an indication that equities are not a priority.
The index records openness and attractiveness of countries to domestic and foreign investment using a variety of parameters.
Financial markets in Africa recorded positive progress when measured on six pillars of depth, access to foreign exchange, transparency, capacity of local investors, legal environment and macroeconomic opportunity.
Mergers, new regulations, innovative financial products, policies incentives and favourable tax regimes are driving the growth for a majority of countries.
Advanced financial market
For a third year running, South Africa maintained the top position as the most advanced financial market in Africa followed by Mauritius which has replaced Botswana in the second position. Nigeria, Africa’s largest economy, is ranked sixth.
Kenya with a score of 65 maintained its third position with Tanzania with a score of 55 was at position seven, Rwanda at position nine with a score of 53 and Uganda 10 with a score of 52.
Tanzania’s score improved significantly from 43 in 2028 driven by a strong investment environment although its stock market remains small and illiquid.
East African countries projected mixed fortunes across various parameters.
Kenya scored high on legal environment, Uganda and Rwanda performed well on access to foreign exchange, Tanzania and Rwanda were poor on market depth, but Tanzania also performed poorly on macroeconomic opportunity.
In Uganda, they are pushing for mandatory listings for firms in strategic sectors such as telecoms, tier one banks and mining firms to increase the number of listed companies on its bourse.
Kenya on its part wants to boost the venture capital and private equity markets to create a pipeline of smaller firms to pursue initial public offerings while Tanzania has created a tax ombudsman’s Office to handle disputes on tax laws.
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