In this exclusive interview by BusinessDays Edozie Ifebi with Donna Oosthuyse, Director of Capital Markets and Tamsin Freemantle, Director of Business Development both of the Johannesburg Stock Exchange, the mind of the international investor community regarding recent economic events in Nigeria is bared. They also give insight into sectors that are appealing to international investors.
What brings you to Nigeria?
The overarching purpose has been to engage and work together with the exchange, the issuers and the investors in Nigeria, as we try to do our part in integrating the capital markets in the region. The purpose of this trip was to give an update on what is happening in our market, as well as to understand better what is happening in Nigeria, to see if there are things we can do to facilitate opportunities between issuers and investors.
What do you think is the feeling among investors in South Africa, regarding issues like foreign exchange and currency management?
The institutional investor market in South Africa has about 8.5 trillion Rand in asset under management (AUM). That is just non-bank financial institutions i.e. the pension funds, insurance companies, and collective investment schemes. The 8.5 trillion Rand is much bigger than the size of the bank asset pool which is about 5 trillion Rand. So we have a large pool of liquidity and those investors typically are long term investors. And their view of Nigeria is that firstly, they see a very good opportunity: they see an economy that is growing faster than South Africa’s economy, they see an opportunity to diversify their portfolio into companies that are in an economy that is growing faster. In addition, as regulated asset managers, they have mandates from their trustees and advisers, to allocate their assets optimally, and at the moment, they don’t have enough assets for the rest of Africa, excluding South Africa, to satisfy their demand. So they have interests in acquiring exposure to Nigerian companies.
That being said, in any market, when there is policy uncertainty investors tend to take a wait and see attitude because they are much more comfortable investing in an environment where things are clear, and they can assess their risks and returns. When things aren’t clear they don’t really know what the risks are, or what the returns are going to be. And they tend to wait. That may be what we are seeing in Nigeria. Investors are having a wait and see attitude until some of these policy questions are clarified.
Overarching, there is a strong interest in investing in Africa, and we see that in how investors invest in our own stocks. MTN for example, derives 60% of its revenue from Nigeria. The day after the Nigerian elections, MTN stock went up about 7% – 8%. Also, companies like Shoprite, and Naspers, which has a big investment in China. Investors globally were buying Naspers in order to get access to that investment in China.
And it is the same with other South African companies that have exposures to the rest of Africa.
We know from that behaviour that investors are looking for exposure into these high growth economies in Africa and one of the ways to get it is by investing through the JSE.
The JSE is a large exchange. Its market cap is 1 ½ times the size of South Africa’s GDP and liquidity is high (about 40% liquidity). It is an open market since 40 percent of the trades on the JSE is conducted by international investors. The JSE is the best regulated exchange in the world according to the World Economic Forum (WEF) for 5 years in a row. So investors know our environment and feel comfortable trading on it. Therefore, they want to buy African risk through our environment.
There is demand for exposure to Nigeria, to Kenya, and to other African countries notwithstanding what may be some short term policy uncertainty.
Will the Naira devaluation help to make things clearer? Will this bring the much needed calm that investors want to see?
In a market economy, there is a price for something. And if the official price for that thing is different from the parallel market price for that thing, then there has to be some action that will equalize those markets. And I believe that when investors see a unified price, they will feel more comfortable that that is the true price of that object, which is the exchange rate in this case.
I don’t think that investors are necessarily focused on just the exchange rate policy. I think that they are looking at a much broader set of criteria when considering investing in Nigeria: high growth opportunity, largest population in Africa, a lot opportunities in the consumer products industries, big opportunities in energy. That is what investors are looking at.
If there are short term considerations, if you expect that there is going to be a devaluation, then you might expect that you can get a better price later after the devaluation. So you just wait. But that doesn’t mean that your basic investment theory is wrong. You are just waiting for your time. But I do say that there is a lot of interest in the African and Nigerian story back in South Africa.
We also see this behaviour in our market: When the dollar strengthens and the Rand devalues, we tend to see more buying from foreign investors because South African assets are cheaper at that time.
Does the recent slide in commodity prices dull the attractiveness of the Nigerian economy?
Commodity prices are cyclical, and to an extent, because of their cyclicality, there is a very important reason for the composition of GDP to be diversified. In the case of South Africa: we are known as a mining economy, and mining is very important for our export revenues. In terms of its percentage of GDP, it’s actually quite small. And even in the market cap on the JSE, the mining sector isn’t as strong. The Services sector is now the most important in terms of GDP. I think in the case of Nigeria, from what I can see and from the engagements we have had, there are already efforts underway to diversify the economy. Telecommunications is now a growing part of the economy for example. The consumer industries are getting to be more important. Real estate and construction, infrastructure, and the vertical integration around energy – upstream and downstream.
Although there may be short term pressures because of reliance on commodities either as export earnings or fiscal earnings, there’s still a compelling reason for economic diversification. It is currently happening in South Africa. And I see it happening in Nigeria.
I think you’ll see a lot of investment going into energy in Nigeria, even though oil prices are still low, because it has been a sector that has not been able to be accessed by investors.
Another reason is that a lot of the onshore assets are been sold by the big players into Nigerian ownership, which is a great story in terms of the growth of the wealth of Nigerians, as opposed to the big oil players.
Looking at the market cap of the Johannesburg stock exchange by industry, which sort of reflects the GDP, (though not exactly the same), mining and resources, whereas years ago it accounted for 50 percent of market cap, today it has been diluted by the growth of other sectors to about 23%.
How long do you think this diversification might take in Nigeria, using South Africa as an example?
It can be quicker for Nigeria, than it was for South Africa.
What sectors do you think hold the biggest attraction for investors in South Africa?
The energy sector is a sector that has been closed to private investment, even though there is interest in that sector notwithstanding of the prices of oil. The automobile manufacturers are interested in Nigeria. Consumer industries, commercial real estate, cinemas, shopping malls, and housing. Also, financial services and logistics.
Do you think more financial investment products will be coming into the Nigerian capital markets following the entrance of NewGold ETF into the NSE?
I will say yes for a couple of reasons. There is a trend globally for growth in exchange traded products. Reasons are that they tend to be cheaper to invest in and the returns are therefore higher because there aren’t so many costs associated with the investments. They are easy to track in terms of what they reference. And there has been a trend globally for investors to have some passive element in their portfolios because looking globally, there are not a lot of fund managers that outperform the market. So some investors will pursue exchange traded products for a passive strategy. Some of them will do it to get a specific exposure, like exposure to commodities like gold. We have seen the growth of them in South Africa.
But one of the prerequisites to that is if we have a good mechanism for indices, because the ETP has to track something. The NSE has announced an association with MSCI, which is an index provider. And now that they have got that, I believe that we will be seeing more exchange traded products in Nigeria.
And we are trying to encourage our issuers to issue exchange-traded products in Nigeria. And we will like Nigerian issuers to issue ETPs in South Africa, because we think that is how the market can better integrate.
There were talks early in the year of making it mandatory for certain companies to list. If peradventure, that kind of legislation comes into effect, what do you think will be the reaction from potential foreign investors?
If investors know what the rules of the game are before they go into a country, then they are comfortable with it. I’ve heard of companies that invest in other countries where they know that as a condition to invest, they have to float a part of the investment in that country. I worked for 30 years in Citibank. When we invested in Mexico, we knew that we had to float the company in Mexico. That was a condition for the investment.
The concern that investors have is when rules change after they have already made their decision.
I can understand why there will be an interest by government to have some of the company ownership floating on the exchange for the interest of the public.
It is one of those debates where there is no right or wrong. Rather, it is a situation where the investors know the rules of the game, and make their own decision. When the rules change half-way, it creates uncertainty, and then investors hold back.
When things like that are being discussed, the best thing that can happen is that a decision be made quickly, so that investors know where they stand. But if they don’t know, they will tend to wait.
Listing on a public market brings benefits, but it also brings obligations. So for a company to be happy to list on a public market, it’s always good to present benefits to the company. Also, companies, operate far better with a carrot than with a stick. Looking at what Morocco did a few years ago, they gave companies tax holidays for a certain period if they listed. This encouraged a lot of companies to come to the market. Although all governments are looking to build up tax revenue, and not decimate it, there are certain things that the government can do if they would like companies to list. Instead of saying they must, the government can provide incentives to make the companies want to do it.
Looking at the example of Morocco, they had about 16 IPOs just after they brought in that legislation.
This is the first time that an opposition party has wrested power from a ruling party. What are your expectations of the President?
There was complete euphoria in South Africa at the news of the election result. We were thrilled. There was a lot of respect and admiration for the outcome of that election. There was also a lot of delight because a lot of countries around the world that were doubtful of Africa were proved wrong. It was fantastic for us as a fellow African country.
After the President has come in on the euphoria that the democratic process functioned as good as people hoped it would, how does he deal with the realities of the challenges?
From the conversations we have had with people, the wish list we are hearing from the market is that firstly, he should name his cabinet. That is the top of the list from what we have been hearing.
Second will be to integrate financial policies and exchange rate policy.
We haven’t heard a lot on tackling corruption because there is the assumption that he is going to do it.
The 2 issues we keep hearing the most about are naming of the cabinet and integrating monetary policy and exchange rate policy, And quite frankly, to really look at the capital controls.
What investors are saying so clearly is that, we don’t mind what the policy is, we just want to know what it is. So if you’re going to tell us to pay 20 percent more tax, that’s fine, but we want to know what the situation is. Unless investors know long term what is going on, it will be very difficult to make an investment decision.
There has been concerns around corporate governance and adequate disclosure in Nigerian companies. Do you think this a big concern for foreign investors that want to come into Nigeria?
There is a huge level of importance that investors place on disclosure and due diligence. Having high standards of disclosure and due diligence is going to enhance the value of the assets in the market. We see that in South Africa. The JSE is the best regulated exchange 5 years consecutively across the world by the WEF. That has enhanced the value of the companies in our market, and that gives investors certainty.
The exchange has to establish the standards of compliance. And if the standards are met, (and the exchange has to enforce those standards), it is up to the investor to do their due diligence, to make sure that they are getting the right value.
I believe that the higher the standards of disclosure and governance, the higher the value of the companies on the exchange.
The NSE has done a lot of work over the last 5 years, in ensuring the on-going compliance of Nigerian-listed companies. Some companies have been delisted for not submitting their financials. That sends a very good message to the market and to the investors as well.
Enforcement is very important. You can have the biggest rules, but if they’re not being enforced, it is like a dog with no teeth.
The JSE itself is listed on the exchange.
Edozie Ifebi
