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Nicholas Ganz, PwC Africa: Capital Markets Leader
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African capital markets continued to reflect strong figures for 2015-but challenging times may lie ahead. This is according to the researchers leading the recently released PwC 2015 Africa Capital Markets Watch publication.

According to Coenraad Richardson (PwC South Africa: Capital Markets Partner), Clifford Tompsett (PwC Global IPO Centre Leader) and Nicholas Ganz (PwC Africa: Capital Markets Leader), the report surveys all new primary market equity IPOs and FOs by listed companies, as well as high-yield (HY) and investment-grade (IG) debt capital markets activity, in which capital was raised on Africa’s principal stock markets and market segments (including exchanges in Algeria, Botswana, Cameroon, Cape Verde, Côte d’Ivoire, Egypt, Libya, Gabon, Ghana, Kenya, Malawi, Mauritius, Mozambique, Namibia, Nigeria, Morocco, Rwanda, Seychelles, Somalia, South Africa, Sudan, Swaziland, Tanzania, Tunisia, Uganda, Zambia and Zimbabwe).

“Between 2011 and 2015, African equity capital markets (ECM) activity consisted of 105 IPOs and 336 FOs, with 2015 accounting for the largest number of IPOs and FOs in the period with 28 and 91, respectively. African debt capital markets (DCM) activity on African exchanges was comparatively muted in 2015, with a decline from 2012 and 2013, years which saw a peak in terms of volume and value of debt capital raised, respectively.

“In 31 December 2015, African exchanges had a market capitalisation of approximately $1 trillion, with 23% of this value residing on exchanges outside of South Africa. Though statistics cannot be interpreted in isolation, certain metrics commonly used to analyse global market performance, such as the market capitalisation-to-GDP ratio, suggest that untapped value remains in Africa, with the potential for further sustained growth in African market capitalisation,” according to Ganz.

He says growth across the continent, the outlook for which varies based on the diverse and specific cultural, economic and political circumstances of each country, will require continued investment in various sectors including infrastructure, agriculture, consumer products, telecommunications and financial services, alongside the other industries more traditionally associated with Africa.

In 2015 both local and international capital markets continued to feature as a primary funding source for this growth, in conjunction with private equity investment and mergers and acquisitions (M&As), reflecting the continued appetite from investors with key portfolio allocations targeted towards emerging and frontier markets. Though this upward trend in activity has now been observed over the trailing five-year period, the report recognises that uncertainties in the market and economic trends may see a more challenging 2016.

Taking a closer look at African capital markets in 2015, the report reflects five different trends:

1.     Africa remains resilient amidst lower growth expectations: The decline in commodity prices, particularly the oil price; concerns about levels of demand from China; and the relative weakening of local currencies, resulted in slower growth projections across a number of economies in 2015. However, Africa continues to have more than just one story, with certain countries expected to continue on a stronger growth trajectory in 2016. Renewed focus on tackling corruption should also help to increase inflows of foreign direct investment (FDI), supported by improved security and better governance. South Africa, the continent’s most advanced economy, experienced its own challenges at the year end, brought on by surprise political manoeuvres, which have shaken local and global investor confidence. Nevertheless, the Johannesburg Stock Exchange (JSE) ended the year up nearly 2%, reflecting the depth of liquidity in the market to absorb negative events and the prevalence of traded shares that act as a hedge to South African rand returns.

2.     Active equity markets: Equity issuances by African companies continued to show strong activity in 2015, hitting five-year highs in both volume and value. Industry subsectors such as real estate and food and beverage showed a robust performance in the year, continuing to reflect the megatrends affecting the African continent. While persistent, record-breaking activity in 2016 is less certain, some significant listing---both primary and secondary---have already been announced, and ECM activity is expected to reflect the continued desire of local companies seeking financing to grow into regional players, as well as private equity investors seeking to capture return through an IPO exit.

3.     Technical advances, strengthened regulation and harmonisation have improved size and liquidity of markets: Harmonisation of East African exchanges and structured collaboration between exchanges, among others, have allowed these markets to become more liquid and active and to improve turnover ratios. There is an indication that some activity may currently be impeded by outdated trading, clearing and settlement systems, improvements to which are now on the agenda for many exchanges to handle sizeable capital inflows. This improved efficiency will lower barriers and enhance the attractiveness of African stock markets for equity investors.

4.    Sovereign bonds dominate debt markets: As in each year over the period analysed, sovereign bonds dominated debt markets, accounting for 47% and 44% of the total bond market measured by value in 2015 and over the five-year period, respectively. As an alternative to high debt servicing costs for local currency debt, African countries have specifically tapped international debt markets over the past years to obtain funding of less costly foreign currency. Although the market for corporate bonds remains small and most popular in the financial services and oil and gas sectors, a shift to other sectors may be emerging. In March 2015, for example, East African Breweries became the first non-banking corporate in East Africa to issue a bond in international markets.

5.     End to the record low interest rate environment: Record low interest rates globally created an issuer-friendly debt market over the past five years with sovereign issuances leading the field. However, the increase in interest rates following the end of the US Federal Reserve’s quantitative easing programme has distinctly cooled bond markets. Furthermore, weakening of local currencies relative to the US dollar and other major funding currencies has made risk management and repayment of these foreign currency denominated bonds more expensive, suggesting that this kind of funding may be less attractive during 2016.

As for trends in global equity markets from 2006 until 2015, globally, the number of IPOs in 2015 remained fairly stable as compared to 2014, whereas the total amount of money raised through IPOs decreased by 26%. IPO trends in Africa were more positive in 2015 than globally, though African FOs were more aligned to global trends.

African equity markets

In line with global trends, 2015 was a challenging year for the African equity markets, with the return of market volatility and emergence of renewed global economic uncertainties, some of which have been closely linked to the ‘Africa Rising’ narrative. While many economies have faced challenges in traditional sectors, a number have responded by shifting focus and strategy to more stable sectors, as illustrated in the report’s ECM industry sector analysis.

“African ECM activity in 2015 was driven by continued capital growth in the financials sector. Other non-commodity sectors, such as renewable energy, real estate, infrastructure, construction, agriculture, health care and consumer goods, have also become more significant to the growth of African economies. The African IPO market also hit a five-year peak in 2015, with a record 28 listings. 2015 showed a steady overall increase in ECM activity of 18% in terms of transaction volume and 14% in terms of transaction value, compared to 2014.

“However, 72% of 2015 IPO value and 54% of IPO volume were transacted during the first half of the year, reflective of the relatively higher levels of consumer confidence compared to the second half of 2015. Proceeds from ECM activity are displayed in US dollars and the 2015 increase is tempered by the decreasing US dollar value of proceeds raised in South African rand and other currencies. We estimate that on a constant currency basis, the 2015 increase in US dollar-equivalent proceeds would have increased over the prior year by 28% for IPOs and by 36% for FOs,” according to the PwC 2015 Africa Capital Markets Watch.

African IPO data by exchange (2011–2015)

In 2015 capital raised from IPOs by companies on the JSE in US dollar terms decreased by 11% (compared to 2014), largely impacted by the weakening of the South African rand; the rand value of IPO capital raised increased 11% over 2014 levels. Capital raised from IPOs by companies on other African exchanges increased slightly by 3% as compared to 2014. In terms of volume, the JSE saw a 33% increase in the number of IPOs as compared to 2014. The year 2015 was also a good one for the JSE’s Alternative Exchange (AltX), with an increase in listings value of more than double the previous year. After three years with no IPO activity, the Rwanda Stock Exchange welcomed the IPO of the Bank of Kigali in a privatisation of governmental interest in the bank. In contrast, elsewhere on the continent, 2015 saw a major decrease in IPO capital raised on the Nigerian Stock Exchange and on the Bourse de Tunis as compared to 2014. This decline from 2014 on the Nigerian Stock Exchange is due in large part to the significance of the 2014 IPO of SEPLAT.

Over the five-year period as a whole, a similar value of 63% of total IPO volume and a higher 68% of total IPO value were raised in exchanges in SSA countries; the rest was derived from North Africa and outbound IPOs. The JSE remains a reliable anchor of African capital markets activity, ranking second in the world for exchange regulation and first for ease of raising debt or equity capital, according to the World Economic Forum’s Global Competitiveness Report (2015 – 2016). Since 2011, capital raised from IPOs by companies on the JSE represented 45% of the total African IPO capital and 33% of the total transaction volume. Over this period, in second place in terms of IPO volume after the JSE was the Bourse de Tunis with 23 issuances, while in second place by capital raised was the Egyptian Exchange with $861m. In third place in terms of volume was the Casablanca Stock Exchange with seven issuances, and third by capital raised was the Nigerian Stock Exchange with $751 million, over 70% of which relates to the 2014 SEPLAT IPO. On average during this period, capital raised per IPO in total over the past five years was $58 million, with an average of $77 million on the JSE and $46 million on other African exchanges.

The top 10 African IPOs by value in 2015 took place in South Africa, Egypt and Morocco. IPOs of real estate and property companies (within the financial sector) specifically represented a greater share of top 10 IPOs during 2015.

African IPO breakdown by sector in 2015

During 2015, the financials sector continued to dominate the African IPO market at 46% of total value and 50% of total volume, followed by the health care, consumer goods and industrials sectors in terms of value. This is consistent with global IPO trends, where the financials sector proved to be the most active sector in 2015.

Health care ranked second at 17% and consumer goods third at 16% in terms of IPO value in 2015. Compared to the average over the last five years, 2015 saw a slight decrease in the financials sector and an increase in industrials, consumer goods and health care in terms of value; and the industrials and consumer goods sectors in terms of volume.


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