High transaction costs discourage investors from capital market ― LSE
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.”