High trans­ac­tion costs dis­cour­age in­vestors from cap­i­tal mar­ket ― LSE

The Punch - - INTERVIEW - Fey­isayo Popoola

The Lon­don Stock Ex­change Group has said the high trans­ac­tion costs in Nige­ria and other African coun­tries are re­spon­si­ble for the low stock mar­ket ac­tiv­ity as it dis­cour­ages in­vestors.

In its African cap­i­tal mar­kets re­port, which was re­leased on Fri­day, the LSE said the high cost of trans­ac­tions had a neg­a­tive im­pact on net prof­its, along­side stamp duty and cap­i­tal gains tax.

It said while low trans­ac­tion costs and high liq­uid­ity were needed for higher mar­ket par­tic­i­pa­tion to take place, higher mar­ket par­tic­i­pa­tion would im­prove both trans­ac­tion costs and liq­uid­ity.

The Africa Ad­vi­sory Group, LSEG, in a re­port of rec­om­men­da­tions on how to at­tract pas­sive in­vest­ment flows to African mar­kets, iden­ti­fied the lack of un­der­stand­ing among African stake­hold­ers around the ben­e­fits of a coun­try clas­si­fi­ca­tion up­grades as hin­der­ing pas­sive flows into Africa.

It added that high trans­ac­tion costs and in­suf­fi­cient lev­els of liq­uid­ity, and the lim­ited re­search coverage of African eq­ui­ties, were also hin­drances to pas­sive in­vest­ment in­flow.

The re­port read in part, “Pas­sive in­vest­ment funds are key in­stru­ments in sup­port­ing the depth of African cap­i­tal mar­kets. Th­ese funds track the per­for­mance of a fi­nan­cial in­dex, with a longer-term view of re­ceiv­ing a re­turn by fol­low­ing the up­ward trend in the mar­ket.

“Pas­sive funds have been iden­ti­fied as a key form of cap­i­tal for Africa, pro­vid­ing sup­port to its economies by pro­vid­ing ac­cess to in­vestors world­wide.”

The LSE stated that in or­der for the con­ti­nent to con­tinue its sus­tained growth, do­mes­tic cap­i­tal mar­kets must be de­vel­oped in line to en­able greater em­ploy­ment and wealth cre­ation within the economies across the whole con­ti­nent.

It noted that Ex­change­traded funds and in­dex funds were the main in­vest­ment in­stru­ments used for bench­marked pas­sive in­vest­ing.

The LSE added that an anal­y­sis of the present broad­based emerg­ing mar­ket funds showed that Africa at­tracted an es­ti­mated 7.5 per cent of the to­tal pas­sive in­vest­ments, of which South Africa at­tracted 7.4 per cent of to­tal flows and Egypt the re­main­ing 0.1 per cent.

“In terms of Africa alone, com­bin­ing Emerg­ing and Fron­tier Mar­kets, South Africa ac­counts for 75 per cent of the pas­sive flows cap­tured by this anal­y­sis, with only two more coun­tries be­ing rel­e­vant: Nige­ria (11 per cent) and Egypt (10 per cent),” the re­port read in part.

It said, “It has been es­tab­lished that for African mar­kets to at­tract global pas­sive flows, lo­cal cap­i­tal mar­kets need to strive to achieve a higher coun­try clas­si­fi­ca­tion sta­tus.

“Lo­cal pol­icy-mak­ers, reg­u­la­tors and mar­ket in­fra­struc­tures, sup­ported by de­vel­op­ment fi­nance in­sti­tu­tions and fi­nan­cial ser­vices firms, need to take co­or­di­nated mea­sures to ad­dress key short­com­ings in African cap­i­tal mar­kets that would serve as a bar­rier to achiev­ing this.”

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