Strength lies in unity and partnerships, which is why Africa’s leading stock exchanges are about to implement a groundbreaking cross-border trading collaboration. Called the African Exchanges Linkage Project (AELP), it centres on an order-routing system that will enable the continent’s exchanges to trade on each other’s markets.

This means a domestic stockbroker in Johannesburg, Nairobi, Lagos or Casablanca can place investor orders on any of the participating African exchanges, stimulating cross-border investment flows and improving the liquidity of Africa’s capital markets.

Corporates will ultimately benefit from the opportunities to raise capital through issuances across multiple jurisdictions – which is expected to attract more institutional investment activity across Africa.

‘The project management office of the AELP is currently working on an implementation plan with DirectFN, the contracted supplier, and it’s anticipated that Phase 1 of the project will go live before the end of Quarter 1 of 2022,’ says Anne Clayton, head of public policy at the Johannesburg Stock Exchange (JSE), which is Africa’s dominant bourse and among the top 20 largest stock exchanges in the world by market cap.

‘The AELP is a great addition to many collaborative initiatives in Africa,’ she adds, highlighting the opportunities that the African Continental Free Trade Area agreement in particular will bring for the stock exchanges collaboration, as it will promote market integration and encourage Africans to invest in their own markets.

‘African exchanges have been considering ways to improve the liquidity and depth of our markets, and so instead of looking to foreign investors to provide liquidity, we’re targeting intra-African flows,’ says Clayton, who has been leading the project for the JSE for several years. The AELP is the flagship project of the African Securities Exchanges Association, supported by the AfDB.

Collectively, the participating stock exchanges account for more than 1 050 African companies, valued at US$1.2 trillion or 95% of the market cap of the continent’s exchanges. There are seven exchanges in the first phase of AELP, covering 14 countries, as the Bourse Régionale des Valeurs Mobilières (BRVM) is a regional exchange that integrates the eight member states of the West African Economic and Monetary Union (Benin, Burkina Faso, Côte d’Ivoire, Guinea-Bissau, Mali, Niger, Senegal and Togo). The other AELP participants are the Casablanca Stock Exchange in Morocco, the Egyptian Exchange, the JSE, the Nairobi Securities Exchange in Kenya, the Nigerian Stock Exchange and the Stock Exchange of Mauritius. Additional bourses will be taken on board in due course, once the scheme is up and running.

AELP project manager Tom Minney explains how the order-routing technology platform works. ‘The AELP link will send clients’ buy and sell orders from a stockbroker on one market to a sponsoring broker on a market where a security is already traded,’ he says. ‘The link will include all listed securities such as equities, bonds, exchange-traded and other funds, and real estate investment trusts. The aim is to make it easier for an investor in one participating market to buy and sell securities listed on other participating exchanges.’

As many African stock exchanges account for only a comparatively small market cap, traded value and turnover, the smaller players in particular will benefit from having access to the more diversified and established stock markets of their larger counterparts – notably South Africa and, increasingly, Egypt, Kenya and Nigeria. This addresses, among other issues, a key constraint to African stock-exchange development, namely the small number of listed stocks and available trading instruments. Here the continent’s tiny newcomer is a case in point, as Lesotho’s national bourse, the Maseru Securities Market, announced its first (and so far only) listing in December 2021.

By working together, sharing information and collaborating with regulators, regional initiatives such as the AELP intend to strengthen and improve Africa’s bourses. Building liquidity at home in African markets will attract international investors because, as the saying among financial experts goes, ‘liquidity begets liquidity’. Technology plays a significant role in this, seeing as it’s an enabler and leveller that has accelerated digital transformation and helped exchanges with their business continuity during the ongoing global pandemic.

The Nairobi Securities Exchange (NSE) seamlessly transitioned to a fully automated environment as result of COVID, and is now one of many African exchanges that are able to operate entirely remotely, from the start to end of each trading day, when necessary.

Absa’s Africa Financial Markets Index 2021 reports how tech innovation is encouraging greater retail participation on the continent’s stock exchanges and easing listing processes for issuers. The Malawi Stock Exchange, for example, started a WhatsApp portal to engage with ‘ordinary’ investors, while Rwanda developed a platform enabling people to buy and sell government securities using their mobile devices. This focus on retail investors goes hand in hand with an increased interest in smaller companies that historically would not consider listing.

In line with this trend, the Stock Exchange of Mauritius launched its Venture Market, a platform for shareholders of unlisted companies to trade their securities, and Kenya’s NSE officially announced its Unquoted Securities Platform. This automated platform provides unquoted (unlisted) companies with access to capital and an introduction to capital-market transactions, easing their possible transition into the main quoted market.

‘There has been substantial growth in the number of securities trading over the counter,’ said Geoffrey Odundo, NSE chief executive, at the virtual launch in May 2021.

‘Most involve leading securities of well-developed companies across various sectors of the economy including commercial banks and insurance companies, co-operative societies, leading private companies among many more. Equally, the last few years have witnessed an increase in the number of companies raising long-term initial and ongoing equity and debt capital through private placements.’

A private placement, as opposed to one on the open market, refers to selling shares or bonds to pre-qualified investors and institutions. The JSE has just dedicated a new, wholly owned subsidiary – JSE Private Placements (JPP) – to simplifying, automating and streamlining the process of private-capital raising. ‘The establishment of JPP aims to advance and digitalise capital raising for infrastructure finance and SMEs, which will support a critical growth node across the continent in the infrastructure and SME sectors,’ says Valdene Reddy, JSE director of capital markets. ‘The JPP platform benefits both private companies and investors, and will be a valuable growth enabler for our capital markets. Our engagements with institutional investors and private companies suggest that the market is eager for this service because of the efficiencies it will introduce.’

The automated, digitalised JPP solution connects companies directly to investors, including venture capital funders, to create a transparent, efficient and accessible private placements market. Initially the focus will be South African SME and infrastructure funding, but this will be extended to the rest of the continent in due course.

Similarly, the migration from small to large has been achieved through the JSE’s Alternative Exchange (AltX), which was launched nearly 20 years ago as a springboard for smaller companies to list locally. ‘AltX offers opportunities for strong growth to smaller companies, best illustrated by the fact that AltX has a high migration rate from a small-cap secondary board to its Main Board,’ says Reddy. ‘Many companies like Rockcastle, Sirius Real Estate and Curro migrated from AltX to the JSE’s Main Board and immediately became mid-cap companies due to the phenomenal growth they were able to achieve through their initial AltX listings.’

Since the inception of AltX, a total of ZAR74 billion has been raised, 140 companies have listed on AltX, and 40 of those migrated onto the Main Board. However, the AltX and the JSE have since received competition from four alternative exchanges in South Africa that use technology to cut listing costs and attract business. They are A2X Markets, ZAR X, Equity Express Securities Exchange (all based in Johannesburg), and the Cape Town Stock Exchange, which was re-launched in October 2021, having started out in 2017 under the name 4 Africa Exchange.

‘We want all South Africans to think differently about capital raising on stock exchanges,’ says the Cape Town Stock Exchange, which focuses on small- and medium-sized businesses. It targets growth companies (with a market cap of between ZAR25 million and ZAR2 billion) looking to build up both the South African and broader African economies. According to Bloomberg, the Cape Town Stock Exchange is in talks with other African bourses to share its technology offering and work on a revenue-share basis – hoping to become the ‘Nasdaq of Africa’ by attracting companies looking to raise capital in Kenya, Nigeria, Ghana and others.

This echoes the collaborative spirit of the AELP, which sees the bigger picture and promotes regional integration instead of rivalry in pursuit of intra-African opportunities for investors and issuers, ultimately deepening the liquidity of the continent’s capital markets.

By Silke Colquhoun
Images: Gallo/Getty Images