Capital flows and the development of African economies: A case study of the Ai index

1. Capital flows and the development of African economies: A case study of the Ai index

2. About us Africa investor is specialist investment news and communications consultancy providing services from Lagos, Johannesburg and London We were established to shed light on economic opportunities in Africa We are advised by a board of investment experts and work at the intersect of business, government, media and civil society We publish Africa investor magazine, Ai.com and provide investor research and investor relations/ financial pr advisory services Our clients include the London Stock exchange, UNCTAD, AfDB, and NEPAD

3. Africa�s stock markets are among the best performers in the world Sub-Saharan Africa ex South Africa markets have provided high US dollar returns The graphs show that investor returns in Sub-Saharan Africa ex South Africa have out-performed with lower volatility MSCI Far East, MSCI Eastern Europe and South Africa. The graphs show that investor returns in Sub-Saharan Africa ex South Africa have out-performed with lower volatility MSCI Far East, MSCI Eastern Europe and South Africa.

4. Emerging market investment funds are mainly investing in South Africa Overall, the bulk of GEM holdings, 55% of the total, are in Asia, while holdings in sub-Saharan Africa are valued at $9.4 billion, or 10% of the total (see Annex B; Table B1). But two striking facts immediately surface from this data: (a) every fund in the sample has at least one holding in South Africa and (b) a scant $28 million is held in Africa�s frontier markets. Overall, the bulk of GEM holdings, 55% of the total, are in Asia, while holdings in sub-Saharan Africa are valued at $9.4 billion, or 10% of the total (see Annex B; Table B1). But two striking facts immediately surface from this data: (a) every fund in the sample has at least one holding in South Africa and (b) a scant $28 million is held in Africa�s frontier markets.

5. �frontier markets� still receive a tiny fraction of emerging market investment South Africa is now the forth largest destination of global emerging markets investment GEM to South Africa has grown in absolute terms and as a share of the global total.. Since 1995 it has almost doubled, while its absoute holdings have risen from under $1.85 billion a decade ago to $9.4 billon held in 2005. The story for frontier markets is almost the opposite. The other markets attracted a combined total of 0.03% of the total assets So what are the reasons behind this?South Africa is now the forth largest destination of global emerging markets investment GEM to South Africa has grown in absolute terms and as a share of the global total.. Since 1995 it has almost doubled, while its absoute holdings have risen from under $1.85 billion a decade ago to $9.4 billon held in 2005. The story for frontier markets is almost the opposite. The other markets attracted a combined total of 0.03% of the total assets So what are the reasons behind this?

6. There are signs that interest in Africa regional equity funds is reviving Markets outside south Africa have remained off the radar screen of investors However there are signs interest is reviving: Investec has raised $25 million and invested in 10 countries. Only 34% of the portfolio is in South Africa and it plans to limit its South African holdings to 50% or under. So regional funds are likely to to be the dominant foreign fund players in the region. So why is Africa not receiving more equity investment?Markets outside south Africa have remained off the radar screen of investors However there are signs interest is reviving: Investec has raised $25 million and invested in 10 countries. Only 34% of the portfolio is in South Africa and it plans to limit its South African holdings to 50% or under. So regional funds are likely to to be the dominant foreign fund players in the region. So why is Africa not receiving more equity investment?

7. Challenges for frontier markets The markets are too small but not out of whack given the size of the economies Markets are only small but also relatively illiquid South Africa�s turn over ratio is approximately 40 percent, whereas the ratio is much smaller for other small exchanges. Nigeria � 10% Kenya � 8% Others � approx. 2% 5 out of 10 exchanges list 10 or fewer companies Nigeria and Zimbabwe list less than 50 12 out of 14 frontier exchanges have total market capitalization under $3 billion 14 frontier markets trade an average of $2.4 billion a year, whereas the Global SE traded an average of $150 billion per day in 2004 But, being extremely small in comparison to developed or even mid-sized emerging markets, they are not out of line with global norms given the size of their host economies. The markets are too small but not out of whack given the size of the economies Markets are only small but also relatively illiquid South Africa�s turn over ratio is approximately 40 percent, whereas the ratio is much smaller for other small exchanges. Nigeria � 10% Kenya � 8% Others � approx. 2% 5 out of 10 exchanges list 10 or fewer companies Nigeria and Zimbabwe list less than 50 12 out of 14 frontier exchanges have total market capitalization under $3 billion 14 frontier markets trade an average of $2.4 billion a year, whereas the Global SE traded an average of $150 billion per day in 2004 But, being extremely small in comparison to developed or even mid-sized emerging markets, they are not out of line with global norms given the size of their host economies.

8. Other challenges � what we hear from investors Chicken and egg situation Chicken and egg situation

9. Other challenges � what we hear from investors Chicken and egg situation Chicken and egg situation

10. What we are doing �Africa investor index series In line with our objective to hi-light portfolio investment opportunities in Africa�s markets we decided in late 2005 to design a stock market index capable of tracking Africa�s leading companies and providing investors with a Pan-African benchmark Include scan of the index in Business DayIn line with our objective to hi-light portfolio investment opportunities in Africa�s markets we decided in late 2005 to design a stock market index capable of tracking Africa�s leading companies and providing investors with a Pan-African benchmark Include scan of the index in Business Day

11. Constructing a pan-African index: problems and solutions Problem A size based pan-African index would be dominated by South African companies and would merely reflect the JSE [index] An index weighted by market capitalisation would effectively track South Africa�s biggest firms A lot of African firms have closely held shares and / or are not actively traded Solution Ai caps the number of companies taken from each market Ai uses a market capitalisation based weighting modified to reduce the influence of the larger companies and increase that of the smaller ones. This is taken into account in the Ai 40 by ranking countries based on the 3-monthly average traded volume as a proportion of their market capitalisation

12. Constructing a pan-African index: the mechanics

13. Valuation: weighting factors based on market capitalisation

19. Ai newswire Beyond full filling its informational role we wanted to make this benchmark the basis for a investment vehicle capable attracting foreign portfolio capital to Africa�s markets in a convenient and cost efficient way. Beyond full filling its informational role we wanted to make this benchmark the basis for a investment vehicle capable attracting foreign portfolio capital to Africa�s markets in a convenient and cost efficient way.

20. Distribution Your press releases, corporate broadcast clips and annual results announcements will be distributed via the largest news aggregators present on the worldwide web.Your press releases, corporate broadcast clips and annual results announcements will be distributed via the largest news aggregators present on the worldwide web.

21. Ai.com Beyond full filling its informational role we wanted to make this benchmark the basis for a investment vehicle capable attracting foreign portfolio capital to Africa�s markets in a convenient and cost efficient way. Beyond full filling its informational role we wanted to make this benchmark the basis for a investment vehicle capable attracting foreign portfolio capital to Africa�s markets in a convenient and cost efficient way.

22. Nigeria capital markets day We have been retained by the LSE to conduct a survey among London based asset managers and secure interest for a road show to be held at the LSE in June 8 Nigerian banks will be participating and we are inviting over 40 international asset managers with an interest in Africa markets for the road show

23. Ai index awards 8th June 2007, London Stock Exchange Categories Most Innovative African Stock Exchange Best Performing Ai 100 company Best African Research Team Best African Fund Manager Best African IPO Best African Investment Bank of the Year

24. Ai index series awards The ceremony will attract 100 leading fund managers, investment banks, executives of Stock Exchanges, director level representatives of African listed companies and members of Africa�s financial community.

25. Ai index series awards Judges: Prof. Wiseman Nkuhlu, Non Executive Director, Old Mutual and former Chief Executive, NEPAD (Chairman of judging panel) Dr Alhaji Bamanga Tukur, Executive President African Business Group and Chairman NEPAD Business Group Brad Durham, Managing Director and Co-Founder, Emerging Portfolio Research Dr Nkosana Moyo, Managing Partner, Actis Arunma Oteh, Vice President, Corporate Management, African Development Bank Prof. Mthuli Ncube, Director and Head of School and Professor of Finance, Wits Business School Maged Shawky, Chairman, Alexandria and Cairo Stock Exchange

26. Diageo Africa business reporting awards Created to transform perceptions about the continent Recognise and reward journalists and editors who promote a more balanced view of economic opportunity in Africa Awards ceremony will be held in London on Friday 18th May.

27. Recommendations We need to improve the effectiveness of investor communications in Africa With the assistance of partners, we should establish a programme to raise the profile of African stock exchanges Programme should include capacity building for communications/investor relations expertise in exchanges and listed companies Stock exchanges should encourage increase frequency and quality of reporting Programme should also address issues around data and sharing of information