Some years ago, the Capital Markets and Securities Authority conducted a study to determine the most appropriate stock market structure for Tanzania. The study aimed at, to among others, answer the question — why the number of listed entities at the DSE was not increasing as anticipated in year 1998 when DSE started its operations.
Among others, the study found that: (i) there was low level of awareness about capital market institutions and transactions; (ii) existing listing conditions were too stringent for small, but growing enterprises; and (iii) majority of companies were willing to list on the DSE if conditions for listing were relaxed.
The study also indicated that firms would be interested to list if there will be an alternative market segment of the DSE to complement the existing Main Investment Market, whose target is for relatively well-established corporate entities.
Of the 300 entities that were surveyed: 21 percent stated that they would immediately consider listing on an alternative market segment; and 48 percent would consider the option if they met the listing requirements.
Based on the above, in year 2013, the Dar es Salaam Stock Exchange introduced the Enterprise Growth Market (EGM) segment to complement its Main Investment Market Segment in order to address the SMEs challenges of access to capital.
The introduction of the EGM on the DSE for the listing of SMEs – both at the start-up stage and growth potential – aimed at enabling SMEs country-wide to have access to the capital markets in order to raise sustainable capital and to increase expertise among market stakeholders in financing SMEs.
For the past six (6) years of its operationalization, the EGM market segment has not performed as expected i.e. (i) there are only five (5) companies that have listed in the EGM so far; (ii) investor base of about 270,000; (iii) EGM listed companies total market capitalization is only about TZS 110 billion (i.e. less than 1 percent of DSE market capitalization); and (iv) total volume of shares traded on EGM is less than 0.5 percent of the total annual turnover at the DSE.
These metrics depicts how low are activities on this market segment, which was designed to support SMEs within the Economy, which indicates that we have further challenges than just the lack of existence of institutions, structures and schemes that could enable SMEs to access financing.
From this backdrop, there is a clear need for various stakeholders to consider implementation of solutions that will facilitate addressing some of the existing challenges within our business community – part of it are cultural and behavioral related. In any way there is apparent capacity gap for SMEs owners/managers in the context of managing businesses sustainable, the necessity of good corporate governance, the desire for achieving greater results, etc.
As one of the interventions to bridge the gap, the DSE this week has launched the DSE Enterprises Acceleration Program. This program has the objective of: (i) providing capacity building to identified SMEs to enhance their capacities in key areas of their business growth ecosystem; (ii) create practical linkages and networking solutions between suppliers of funds and those in demand of funds hence bridging the knowledge and financing gaps; and (iii) ease their access to various sustainable funding options, short-medium-to long term, both local and globally.
This is a necessary intervention. It will assist businesses and companies take advantage of the structures and institutions that the country has put in place to enable businesses access to diverse sources of finance.
The Program is for 12-months where 6-months will be for classroom training, the next 3-months for mentorships and couching and the remaining 3-months for Networking and accessing capital from financiers, investors and capital markets platforms. And then, each year there will be a new class for new SMEs participants.
The idea of Acceleration Programs in the financial sector is being championed across many countries i.e. London Stock Exchange Group (which includes Bourse Italia have been running an ELITE Program (which is an acceleration program covering over 300 companies). South Korea has over 200 Acceleration Programs covering many start-up and SMEs – these programs are run by various financial institutions (Industrial and Development banks, Venture Capitalists, Government Agencies, etc), and in Africa– Morocco works with ELITE of LSEG for a similar program covering over 40 companies, BRVM in West Africa also works with ELITE covering over 20 companies, in Kenya, the Nairobi Securities Exchange launched their IBUKA Program in 2019 now covering over 20 companies. And so are other markets.
The DSE Program is run in partnership with UDSM Business School, KPMG Advisory, Institute of Directors Tanzania, Banks, SSC Capital (a Venture capital fund) and the Financial Sector Deepening Trust (FSDT).
Capital Markets for Development Financing
Globally, stock markets’ topical issues in recent times are: how dark pools can be better alternatives to trading platforms, or the role of blockchain technology and Distributed Ledger Technologies as alternatives or complementarities to legacy stock exchanges systems, or how to enhance the role of central counters parties (CCPs) in clearing and settlement for over the counter (OTC) transactions and exchange traded derivative instruments, these are some — one thing to note is that we are all operating in the same global markets competing for same share global capital for economies development.
While these are topical issues in the capital markets space, our domestic issues remains: i.e. lack of awareness and education about the role and relevance of the stock markets in the economy, enhancing of listings of cash-based instruments, how can local institutional investors, such as pension funds can be liquidity providers in the market, etc. Should we up our game? Yes – obviously, our capital markets eco-system needs more players such as private equity and venture capital funds, liquidity providers and market makers, we need transaction underwriters and we need to at least have the second generation plain-vanilla products such as Real Estates Investment Trusts (REITs), Exchange Traded Funds (ETFs), Closed-Ended Collective Investment Schemes, Municipal Bonds, Industrial or Infrastructure bonds, Securities Lending and Borrowings, etc — seems to be in our distant future.
However, as I think of that, I am also mindful of some of the progress we have made in these two past decades. However, despite these milestones, the potential for capital market’s contribution to the economic growth and social development could be better. And hey, if it could be better, what would that mean to us? To respond to such a question, one has to ask — what is the role of the capital market in an open society, whose economic model is market based and supposed to encourage private enterprise?
The existence and actually the growing of the capital market offers a variety of financial instruments that can enable economic agents with the country to raise efficiently priced capital and manage financial risks. Additionally, through assets with attractive yields and enough liquidity but with still risk characteristics, the capital market has the potential of encouraging savings in the long-term financial form. Capital markets as an integral part of the financial markets plays a pivotal role, essential for government, private enterprises and other institutions who are in need of long-term funds to source such funds. Government uses the capital market to raise funds for infrastructure development and state related activities; while the private enterprises use the market for business expansion, growth and development.
Given its role in the market-based economy, the capital markets occupies an important place, via their specific mechanisms, capital markets can efficiently succeed to give its contribution to the economic development of the society. The importance of the capital markets is more significant in the case of emerging markets as it is for developed economies, being well-known for their contribution in reorienting financial resources to efficient activities, contributing to the economic reform, but also in implementing economic empowerment and enterprises transparent-based policies.
Economic growth in a modern economy hinges on an efficient, vibrancy and effective financial sector that pools savings and mobilizes capital for productive projects and enterprises. Absence of effective capital market leaves most productive projects/enterprises which carry developmental agenda unexploited. But if exploited, capital market has the potential for connecting monetary sector with the real sector (such as agriculture, manufacturing, infrastructure, etc), therefore facilitates growth in the real sector and economic development. The fundamental channels through which capital market is connected to the economy, economic growth and development can be in the following aspect:
The contact between economic agents with deficit of money and the ones with monetary surplus can take place in a direct way (direct financing), but also by the means of any financial intermediation form (indirect financing), situation in which specific operators realize the connection between the real economy and the financial market. In this case, the financial intermediaries could be banks, investment funds, or other non-bank financial institutions.
Furthermore, Capital market increases the proportion of long-term savings (in the form of pensions, life insurance, etc.) that is channeled to long-term investment. Capital market enables these long-term contractual savings units to mobilize long-term savings from individual household and channel them into long-term investments. Capital markets fulfills the transfer function of current purchasing power, in monetary form, from surplus sectors to deficit sectors, in exchange for reimbursing a greater purchasing power in future. In this way, capital market enables firms to raise capital to finance their investment.
The necessity of capital markets activities in an economy results into an increase in productivity within the economy leading to more employment, increase in aggregate consumption and hence growth and development. It also helps in diffusing stresses on the banking system by matching long-term investments with long-term capital. The existence of the capital market encourages broader ownership of productive assets by small savers. It enables citizens to benefit from economic growth and wealth distribution and provides avenues for investment opportunities that encourage a thrift culture critical in increasing domestic savings and investment ratios that are essential for rapid industrialization.
Additionally, the capital market mechanism allows not only an efficient allocation of the financial resources available at a certain moment in an economy – from the market’s point of view – but also it permits allocating funds according the return and the risk – from the investor’s point of view – offering a large variety of financial instruments with different profitableness-risk characteristics, suitable for saving or risk covering.
Role of Finance & Investment on ESG
ESG stands for Environmental, Social, and Governance (ESG), referring to three central factors in measuring business sustainability and societal impact of an investment in a company or business. ESG are becoming key criteria in determining the future financial performance of companies (return and risk). Historically, decisions of where financial assets would be placed were based on financial returns, but in these past few decades this has changed significantly.
The current trend is that there has been a new form of pressure applied by environmental groups, social activists and those who promotes good corporate governance leveraging the power of their collectiveness to sensitize investors and financiers and encourage companies and capital markets to incorporate environmental, social and governance challenges into their day-to-day decision-making.
It is from such kind of initiatives that the United Nations Sustainable Stock Exchanges (UN-SSE) came about, which is a peer-to-peer learning platform for exploring how exchanges, regulators and companies can enhance corporate transparency on performance on ESG issues while also encouraging sustainable investments. The UN-SSE, to which the Dar es Salaam Stock Exchange (DSE) is a partner exchange, is overseen by UNCTAD, UN-Global Compact, the United Nations Environment Programme Finance Initiative (UNEP FI) and the Principles for Responsible Investment (PRI).
In a bigger context, these sensitivities inform us that unless concrete actions and measures are taken, we may be headed to the wrong end – as a humanity. From the environmental perspective – threat of climate change and depletion of resources has grown; many investors are now making clear decisions as to which factors of sustainability issues should go into their investment choices. The issues often represent externalities, such as influences on the functioning and revenues of the company that are not exclusively affected by market mechanisms. As with all areas of ESG, the breadth of possible concerns is vast (e.g. Green House Gases emissions, biodiversity, waste management, water management, etc). In these past few months, we have observed on what has happened with the fires in Amazon, California, Australia and then of course the melting glaciers in Pakistan – not a good sign at all.
On the social aspect, investors and financiers’ concerns are on the level of diversity as well as inclusion in companies’ recruitment and management policies. There is a growing perception that the broader the pool of talent open to an employer the greater the chance of finding the optimum person for the job. Innovation and agility are also seen as the great benefits of diversity. And, of course there also issues of human rights and consumer protection. Investors are becoming even more keen on these issues prior to making their investment and financing choices.
On corporate governance, concerns are on the rights and responsibilities of the governance and management of a company—its shareholders, its board of directors and the various stakeholders in that company. There are also matters of management structures, executive and employees’ compensations as well as employees’ relationships.
As matters stands, the three domains of social, environmental and corporate governance are intimately linked to the concept of responsible investment (RI). RI began as a niche within the investment area, serving the needs of those who wished to invest but wanted to do so within ethically defined parameters. But, in recent years it has become a much larger proportion of the investment market and decisions. Such that, we are now experiencing situations where global investors in DSE demand that listed companies produces ESG Reporting (in addition to financial reports), which forms a core part of their investment decision process. In this aspect, we, as exchanges are expected to play a major role in supporting enhanced disclosures on ESG practices by listed companies.
Now, this conversation doesn’t end on how exchanges facilitates capital raising from “responsible investors” – it also involves financiers such as banks and financial institutions and how they relate to who they finance. As it were, the financial system includes commercial banks, insurance, capital markets, Saccos, sector regulators, etc. These market players and regulators plays a pivotal role in capital allocation, managing risks and mobilizing savings and investments. However, the financial system is dependent on other sectors of the economy. For instance, the bulk of companies listed on the DSE consist of commercial banks which majorly lend to agriculture, real estates, manufacturing, tourism, mining, and transportation sector. The inter-dependence of financial system on these sectors puts the stability of the entire financial system at risk due to credit risk exposure and systemic risk arising out of the effect of climate change, social irresponsibility or poor corporate governance behaviors. The shift of mindset, raising awareness and being conscious on ESG issues and how they impact investment and finance is a matter of necessity.
Why It might be time to buy stocks, and how (II)
This is further to the article I wrote two weeks ago. Based on that article many are still questioning; what good is a bargain if the market, as it were, has not recognized its value thus far? What if prices will never come back to their pick days? Why is it that it seems like everyone is fleeing the market? Well, much as I hate looking simplistic, but, these are normal mood swings. This is how markets behaves, there are always ups and downs – depends on the circumstances that causes such swings. By the way, this is not the case for our market only – it is for many developing markets over these past few years – just look across. And so, if you look at the East Africa region for example, the oldest, largest, liquid and sophisticated market is currently year-on-year down by Kshs. 272 billion (equivalent to TZS. 5,500 billion) – that is, it has recorded a drop-in market capitalization and so investors have lost about Tanzania equivalent TZS 5.5 trillion in paper wealth in these past 12-months. And if you decide to look on the trend during these past six-years, their market has tanked over half of its value since year 2013. Now, let us take a look on the DSE market performance, in the form of graphs, during the same period:
Even though investors have lost TZS 2,381 billion of paper wealth in terms of total market capitalization at the DSE in these past six-years, but in terms of domestic market capitalization the market has gained TZS 3,086 billion during this period. Well, so what? Total market capitalization is the total valuation of the market being a factor of number of listed securities and prices performance for these securities. For example, the DSE total market capitalization is a combination of volumes and prices of all 28 equity listed securities (including 7 cross-listings), while Domestic market capitalization is a basket of 21 domestic listed securities’ volume and prices. Hence, the decline in total market capitalization could be argued to have emanated from the decline in prices of cross-listed companies whose primary listing markets are Nairobi Securities Exchange and London Stock Exchange, as well as decline in prices for the domestic listed securities.
At the same time the increase in domestic market capitalization is mainly a result of the increase in the number of listed securities (there has been 10 new listed securities during this 6-year period) and whose impact has outweighed the decline in securities prices, as can be seen in the table below:
So, why should you invest? Reasons are many, but let us look on a few – GDP growth is expected to continue above 7 percent annually, interest and exchange rates are expected to decline, or at least stay the same and the political environment is envisaged to remain calm. Furthermore, bargains seem plenty – dividends yields are trailing at an average of 5 percent, etc.
As I indicated in the previous piece, if you consider yourself a “value-investor”, not a mere speculator, then just don’t be swayed by every opinion you hear and every suggestion you read. History records that whenever there are political, economic or social transformations — businesses and investments suffer hiccups, as they always have, but then comes long term prosperity for those who stay put. And so, by staying invested during this period – or by investing more – value investors can keep their portfolios on track in pursuit of their long-term goals. Sooner, or later the market will mirror the macro-economic strengths, bounces back and benefitting those stayed invested.
A final word: invest and stay invested in shares of a company not because you want their share prices to go up, but because of your motive to own that business. Value-investors have been successful not because they intended to be good in stock trading and speculating on stocks movements, but because they stuck with successful businesses.
Why It might be time to buy stocks, and how (II)
This is further to the article I wrote two weeks ago. Based on that article many are still questioning; what good is a bargain if the market, as it were, has not recognized its value thus far? What if prices will never come back to their pick days? Why is it that it seems like everyone is fleeing the market? Well, much as I hate looking simplistic, but, these are normal mood swings. This is how markets behaves, there are always ups and downs – depends on the circumstances that causes such swings. By the way, this is not the case for our market only – it is for many developing markets over these past few years – just look across. And so, if you look at the East Africa region for example, the oldest, largest, liquid and sophisticated market is currently year-on-year down by Kshs. 272 billion (equivalent to TZS. 5,500 billion) – that is, it has recorded a drop-in market capitalization and so investors have lost about Tanzania equivalent TZS 5.5 trillion in paper wealth in these past 12-months. And if you decide to look on the trend during these past six-years, their market has tanked over half of its value since year 2013. Now, let us take a look on the DSE market performance, in the form of graphs, during the same period:
Even though investors have lost TZS 2,381 billion of paper wealth in terms of total market capitalization at the DSE in these past six-years, but in terms of domestic market capitalization the market has gained TZS 3,086 billion during this period. Well, so what? Total market capitalization is the total valuation of the market being a factor of number of listed securities and prices performance for these securities. For example, the DSE total market capitalization is a combination of volumes and prices of all 28 equity listed securities (including 7 cross-listings), while Domestic market capitalization is a basket of 21 domestic listed securities’ volume and prices. Hence, the decline in total market capitalization could be argued to have emanated from the decline in prices of cross-listed companies whose primary listing markets are Nairobi Securities Exchange and London Stock Exchange, as well as decline in prices for the domestic listed securities.
At the same time the increase in domestic market capitalization is mainly a result of the increase in the number of listed securities (there has been 10 new listed securities during this 6-year period) and whose impact has outweighed the decline in securities prices, as can be seen in the table below:
NAME Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18 Today
TOL 310 550 760 800 780 660 660
TBL 8,100 14,090 14,800 12,000 14,000 12,900 11,400
TATEPA 650 650 650 650 600 120 120
TCC 8,600 16,740 15,950 11,500 16,800 17,000 17,000
SIMBA 2,020 4,500 2,670 1,600 1,200 640 600
SWISSPORT 2,680 5,010 7,350 5,450 3,500 2,660 1,600
TWIGA 2,660 4,000 3,000 2,290 1,460 2,060 2,000
DCB 490 720 570 400 380 340 340
NMB 2,620 3,400 2,500 2,750 2,750 2,340 2,340
CRDB 280 430 405 250 160 150 100
PAL 475 470 470 470 470 400 400
MAENDELEO 600 600 600 600 600 500 490
SWALA – 700 500 500 500 490 490
MKOMBOZI – 1,500 1,000 1,000 890 800 780
MWALIMU – – 665 520 500 500 500
MUCOBA – – – 400 400 400 400
YETU – – – 600 600 600 550
DSE – – – 1,000 1,120 1,400 1,080
VODA – – – – 850 800 800
TICL – – – – – 385 385
NICOL – – – – – 270 175
So, why should you invest? Reasons are many, but let us look on a few – GDP growth is expected to continue above 7 percent annually, interest and exchange rates are expected to decline, or at least stay the same and the political environment is envisaged to remain calm. Furthermore, bargains seem plenty – dividends yields are trailing at an average of 5 percent, etc.
As I indicated in the previous piece, if you consider yourself a “value-investor”, not a mere speculator, then just don’t be swayed by every opinion you hear and every suggestion you read. History records that whenever there are political, economic or social transformations — businesses and investments suffer hiccups, as they always have, but then comes long term prosperity for those who stay put. And so, by staying invested during this period – or by investing more – value investors can keep their portfolios on track in pursuit of their long-term goals. Sooner, or later the market will mirror the macro-economic strengths, bounces back and benefitting those stayed invested.
A final word: invest and stay invested in shares of a company not because you want their share prices to go up, but because of your motive to own that business. Value-investors have been successful not because they intended to be good in stock trading and speculating on stocks movements, but because they stuck with successful businesses.
Pre-IPO Financing for a Sustainable growth of Capital Markets
In our quest to develop, we use various financing tools to finance our economic agents, businesses and enterprises. As we know it, our business enterprises are financed via personal sources, and largely by borrowing from financial institutions – while all aspects of equity financing beyond family/friends for business enterprises is less considered. Rightly so, because of limited in awareness, but also given business growth cycle and maturity of businesses with the economy. And, because of this agents like the DSE has introduced capital raising platforms to enable Start-ups and SMEs to access public funding via issuance of financial instruments (such as shares and bonds) to accelerate their business expansion and hence creations of jobs and enhanced tax revenue to the Government, among other benefits – but with minimal success.
Whatever reasons for not growing the equity side of financing that we front – the fact is that for us to actively finance our growth and development, as long as development and financing goes hand in hand, we need a full range of capital raising options in our finance sector ecosystem. For instance, consider this sustainable and graduating form of financing SMEs: it should start with own sources, then banks and microfinance institutions, before seeking Government grants (if any—especially if in area of R&D), then pursue financing from venture capital and private equity funds before lastly engage the entire public via IPOs and listing to the stock exchange. This is how it is supposed to be.
Where are we in this, our start-ups and SMEs finance are over 90 percent by friends/family and debt finance from banks. There is less than 10 percent risk-based equity finance. This a key gap in our financing, and of course there are other gaps in Tanzania compared to many other markets. In the UK, between 30 and 50 percent of all IPOs emanates from venture capital funds and private equity exits, as it is in Korea, Singapore, etc. Based on the above, one will clearly see the structural gaps in the finance for Start-ups and SMEs to be are as follows:
• no local venture capital or other forms of private or public equity;
• almost no bank equity investment by Tanzanian banks, meaning there is no process for banks to grow companies via equity financing and achieve an exit multiplier as they are almost 100% focus on debt rather than equity;
• no crowd funding and there is minimal debt or grant funding direct to SMEs from Government or Donors.
These gaps mean there is no feeder to the DSE. Unless, all stakeholders work to fix these structural gaps, the capital markets will always face growth and sustainability challenges.
My colleagues and I were recently in Korea, to learn from their experience, as preliminaries towards establishing the Enterprise Acceleration Program at the DSE. We learnt that previous Korean had problem like ours, where it took at least 12 years before a company is potentially ready for listing in the Korean Exchange. This was until the Government pro-actively started working with the private sector to initiate Acceleration Programs (currently there are more than 200 Programs) that includes pre-IPO/listing financing by Venture Capital Funds (partly owned by the Government), Government owned Industrial and Development equity financing divisions as well as investment banks’ specific programs to finance acceleration of Start-ups and SMEs prior to their IPOs and listing in the Exchange.
As a result, the period from Start-up to IPO in Korea has been shortened to 6/7 years from the previous 12 years. Since then, there has been a significant increase in IPOs and companies that have listed in the Starts-up Market segment, the SMEs and technology market segment as well as in their Main Investment Market segment of the Korean Exchange. In a way, this approach by the Government to be hands-on in ensuring there is complete ecosystem in the financial sector and its supporting institutions is a sustainable way towards inclusive and sustainable financing of the economy.
Under normal circumstances, the business of ensuring there are structures and supporting institutions for the financial sector ecosystem could be fronted by both the private sector and government. But then, if one consider and compares cases like that of Korea – a country that moved from the GDP per capital of less than US$ 100 during their independence in 1958 to more than US$ 30,000 now; and Tanzania, which like Korea was with a GDP per capital of about US$ 100 GDP in 1960s, still at around US$ 1,180 – somehow it tells that the examples of countries such as Korea and their approaches where the Government pro-actively engage in not only developing policies and legislative actions but also compliment/supplement these by establishing the necessary supporting institutions and financing them is the right approach to pursue. In the context of our local capital markets growth and development – institutions like venture capital funds, public equity funds, development and industrial banks as well as investment banks for market making and liquidity creation are necessary for a vibrant capital market. These will feed into the current existing structures and institutions, like the DSE for the sustainability of financing our projects and enterprises, while minimizing risk to the less sophisticated well-meaning citizens
Why Persistence in Investing in the Stock Market Pays
Stockbrokers and dealers — collars unbuttoned, sleeves rolled up, yelling into several telephones at once, gesticulating as though their lives were on the line. The air crackles. Every now and again one of them slams a receiver down onto the table like he wants to break it. Then the traders start bawling at each other over their Bloomberg terminals, on which stock prices flash like carnival lights. You will be fair if you agreed with me — this is how the media depicts the world of finance, and the work of stock markets, relaying images from either the stock-market floor/gallery of a major stock markets, or the trading area of a major investment bank.
Let’s change the scene – here there is a dull office on the fourteenth floor of an unassuming high-rise in a sleepy Omaha, Nebraska, the most negligible state in the USA where there is no Bloomberg terminals, no computers, no emails, no nothing as impressive. Just an old-fashioned desk and a telephone, there he sits, day after day as he has done for nearly fifty years: Warren Buffett, the most successful investor of all time.
The contrast couldn’t be starker, on the one hand: hyperactive, sweat drenched, testosterone-laden stockbrokers, on the other a quiet silver haired Uncle Warren. Once you have grasped the difference between speculating and investing you will start seeing parallels everywhere and you will have a good mental tool to hand.
So, what exactly is the difference? the stockbrokers and dealers trying to make a profit through frenetically buying and selling shares and bonds. What’s behind the shares – it is neither the fundamental performances of a software firm based in California or somewhere in Seoul, nor is a copper mine located in Peru or Zambia – these are irrelevant in this case. What matters most to these stockbrokers and dealers is that the share or bonds prices move temporarily in the right direction.
Classic investors however buy shares in only a handful of companies, which they know as thoroughly as the backs of their hands. The opinion of the market reflected in the temporary ups and downs means nothing to them their commitment is long term. To avoid transactions costs they buy and sell as infrequently as possible. Warren Buffet and his long-term investment partner Charlie Munger don’t even seek out new investment opportunities to come to them. From the horse’s mouth: “Charlie and I just sit around and wait for the phone to ring.” So says Uncle Warren.
Who is more successful — speculators or investors”? I would be quick to admit that there are winners and losers on both sides, but the giants among the winners are to be found only on the side of the investors. Why is that? One major difference: investors take advantage of long timespans; stockbrokers don’t. Our brains love short-term, spasmodic developments. We react exaggeratedly to highs and lows, to rapid changes and jarring news — but continuous changes that we barely notice. As a result, we systematically overemphasize doing above not-doing, zeal above deliberation, and action above waiting.
Let’s consider these — what are the most purchased books of all time? not the ones on the current best seller lists or stacked highest on bookshop tables at the bookstores or airports, I mean the ones that have remained continuously in print for decades or even hundreds of years—the bible, Mao’s Little Red Kook, the Koran, the Communist Manifesto, the Lord of Rings, the Little Prince. These are known as “longsellers”, and no major publisher can live without them. The same goes for Broadway shows, tourists’ attractions, songs and many other products. And what is one of the most successful cars of all time? the Toyota Corolla, continuously available as new since 1966 now in its eleventh generation. It wasn’t the first years’ turnover that made the Corolla a superstar but the span of time over which it has been sold.
Such long-term successes often have inconspicuous ingredients that function like baking powder, producing incremental progress that builds up over a long period of time. Take the example of investment; if you invest Tsh.10 million at ten percent return, after a year you will be Tsh.1 million richer. Piece of cake, right. But if you keep reinvesting these modest profits, after twenty years you will have seen an impressive growth of more than Tsh. 40 million, that you could have imagined when you started with your humble Tsh. 10 million. Your capital will accrue not linearly but exponentially, because our brains have no instinct for duration, they also have no feel for exponential growth.
This, then my friends, is the secret of persistence; long term successes are like making cakes with baking powder — slow, boring, long winded processes, but which lead to the best results. The same goes for many aspects of our lives. Just reflect, make a careful observation around you, and you will see.
In our current environment we are meant to be convinced, forced to understand and embrace the idea that in modern times, disruptions, constantly changes of careers and companies, spouse, etc is the way to remain competitive and happy. This may be right and wrong, why? Because sometimes a peaceful and predictable life is what you need and is actually more productive –and what this says is that sometimes a less busy work, more endurance and perseverance, tenacity and long term thinking could be highly valuable, as Charlie Munger says: “only a little bit wiser than the other guy, on average, for a long, long time”. This how you become a value-based investor and not the one stressed with the temporal ups and downs of stocks. Afterall you are not a broker, a speculator or a gambler – you are an investor who looks into the future of yourself and your children, trying to lock into what is possible.
Market Liquidity for further growth and development
Recently, the DSE achieved the Frontier Market Status by FTSE Russell. Reading the FTSE Russell’s qualification criteria one will notice that the DSE currently meets criteria for an Emerging Market Status, except for one key criteria, namely the liquidity of the market. According to FTSE Russell the DSE liquidity is not sufficient to support sizeable global investments.
Furthermore, the recent OMFIF-Absa Africa Financial Markets Index 2019 Report painted the same picture with regard to our market. This report indicates we have made significant progress in many aspects to the extent that we were ranked number seven (7) from number fifteen (15) in 2018, out of the 20 benchmarked markets in Africa, but the one key impediments towards a better ranking is the lack of/limited liquidity in the market. The reason provided is that we lack or have limited local investors capacity. Whatever way one to look at it, liquidity seems to be the existing elephant in the room.
So, what is liquidity in the stock markets context?
Stock market liquidity can be broadly understood as the ability to facilitate large volumes of trade without causing excessive price movements, while still reflecting a steady and fair market price. This concept of liquidity encompasses multiple dimensions, namely: (i) breadth of the market: i.e. the case where the cost of reversing a transaction position over a short period is minimal; breadth is usually identified (and measured) by the bid/ask spread (the tighter the spread, the better); (ii) the depth of the market: a deep market has large numbers of pending orders on both sides of the bid/ask spread. This usually limits the influence of orders on price movements; (iii) the market resilience: this is speed at which stock prices return to stability levels after a shock; and (iv) immediacy of order execution: this is indicated by the speed at which trades can be conducted at a given cost.
Market operators, investors, regulators, and others use a range of metrics to assess liquidity. These include bid-ask spreads, turnover, and turnover velocity (value traded relative to the overall market capitalization). For example, is we consider these past five years, annual turnover on the equity (shares) segment of the DSE has been Tsh. 475 billion while on the bonds segment it has been Tsh. 580 billion. These figures are 5 percent and 6 percent of market capitalization for equity and bonds respectively. At any measure, these ratios are on the very low side. That’s why improving market liquidity in our securities market seems to be the only way to go if we want to make any further progress.
It is important to note that liquidity in the stock exchange, like in other trading venues, is the fundamental enabler of the rapid and fair exchange of securities between stock market participants. Liquidity enables investors and issuers to meet their requirements in capital markets, be it an investment, financing, or hedging, as well as reducing investment costs and the cost of capital.
Liquidity has a lasting and positive impact on economies. As it were, stock exchanges, regulators, and other capital market participants needs to take action to grow liquidity, improve the efficiency of trading, and better service issuers and investors in their markets. The indirect benefits to our market economies could be significant.
So, why does liquidity matter?
The importance of market liquidity and its relationship to financial market development could better be understood by examining the impact it has on various market actors: (i) For investors — more liquid markets are associated with lower costs of trading, an ability to move more easily in and out of the listed securities, lower price volatility, and improved price formation; (ii) Issuers — are attracted to more liquid markets, as they reduce the cost of raising capital and produce more accurate share price valuations; (iii) Stock exchanges — they value the increased attractiveness to issuers and investors, as this translates into greater use of the market, greater confidence, greater ability to attract new stakeholders, and greater ability to do business, which drives revenues both directly (through trading fees) and indirectly (through extending their product offering, for example); (iv) Economies/Countries — as a whole benefit, with companies able to access capital at a reasonable cost, subsequently increasing investment in their business and driving increased employment and their overall contribution to the economy.
There are many ways in which the market can enhance its liquidity. However, the difficulty by market stakeholders, such as institutional investors, to work with exchanges towards the direction of enhancing liquidity is a major hindrance for the DSE.
The case for increasing participation of local institutional investors:
In many early-stage markets like where we are the DSE, the size of the institutional investor base is usually relatively small and often highly concentrated, with relatively low levels of assets under management and limited participation in equity markets. The reasons for this vary between markets, but for us these include: (i) implementation of mandatory and defined benefit pension schemes that restrict the development of a competitive private pension fund sector; (ii) preference to invest in low-risk financial instruments, thereby limiting pensions participation in equity markets; (iii) restrictions on who manage pension fund assets, thereby limiting the emergence of a competitive asset/fund management industry; and (iv) other restrictions, including restrictions of pension fund investment in listed equity markets, in preference for assets classes.
Many frontier and emerging market jurisdictions have sought to address these by transforming pensions schemes by reducing the size of defined benefit pension schemes, the removal or relaxation of legislative and regulatory barriers to investment in equity markets, and the use of tax incentives to encourage both the allocation of funds to institutional investors and the funneling of investments into equity markets.
The Knowledge about Shares and Stock Markets
In the last week’s piece, I wrote about how family businesses may benefit from accessing public money and list their companies in the stock market. As a feedback, some readers requested that we cover the basics: what are shares, why we opine that it is beneficial for privately owned companies to sell shares to the public and why does that relate to listing in the stock market. Today we will cover just that, putting the historical context of stock markets to enlighten us on how far the world of stock markets have come and how fast we have to run in order to catch up with the whole concept of stock market in financing our enterprises, economic growth and development.
The historical context; so, back in the 16th to 18th century, slave trade was not fully controlled by states. It was rather an economic enterprise organized and financed by investors using stock markets in line with the ideas of free markets, private enterprises, private property, etc as aligned to laws of demand and supply. Private slave trading companies sold shares in Amsterdam, London or Paris stock markets to finance slave trade enterprises. Thus, middle class European looking for better investment returns bought shares of such enterprises. Having mobilized funds, companies bought ships, hired sailors and soldiers, purchased slaves from Africa transported them to the Americas. They then sold these slaves to plantation owners, using proceeds from such trade to purchase plantation products i.e. sugar, cocoa, coffee, tobacco, cotton, rums, etc. They returned to Europe with such merchandise, sold them for higher prices and sailed again to Africa to begin another round. As we can imagine, shareholders were very pleased with such arrangements. History records that, throughout the 18th century the yield on slave trade investment was about 6 percent a year. So, during that time and age, humanitarian organisation became business enterprises whose real aim was growth and profits financed by stock markets (and of course bank credits).
This wasn’t only related to Africa and its slave history — and so when in 1821 the Greeks rebelled against the Ottoman Empire, the uprising aroused great sympathy in liberal circles in Britain and other European cities. The London financier saw an opportunity on this as well — they proposed to the Greek Rebel leaders the issue of tradable Greek Rebellion Bonds on the London Stock Exchange. The Greeks would promise to repay the bonds, plus interest, if and when they won their independence. Private investors bought bonds largely motivated by the argue to make a profit, even though there may be some who bought these bonds out of sympathy for the Greek cause. The value of Greek Rebellion Bonds rose and fell on the London Stock Exchange in tempo with military successes and failures on the battlefields. In a way this war turned out to be a financial commodity listed in the stock market — fought, partly in the interest of investors.
In another development, one of the largest financial crises of the 18th century was the Mississippi Bubble. In 1717 the Mississippi Company, chartered in France, set out to colonize the lower Mississippi valley, establishing the city of New Orleans in process. To finance its ambitious plans, the company, which was in good connections at the court of King Louis XV, sold shares to the public and listed on the Paris Stock Exchange. John Law, the company director, who was also the governor of the central bank of France spread tales of the significant riches and unlimited opportunities in the Americas. French businessmen and members of the urban class fell of these promises and the Mississippi company share prices skyrocketed to almost 10 times within a month of its listing. This euphoria swept the streets of Paris, people sold all their possessions and took loans in order to buy the Mississippi Company shares, believing they had discovered the easy way to riches. A few days later, the panic begun, some speculators realized that the share prices were totally unrealistic and unsustainable. Investors started selling these shares, as the supply of shares rose — mainly caused by everyone wanted to get out quickly — their prices declined, setting off an avalanche. In order to stabilize prices, the central bank of France — at the direction of its governor, John Law — bought up Mississippi Company shares, but could not help either, the price of Mississippi shares plummeted and then collapsed completely.
The Mississippi Bubble was one of the history’s most spectacular financial crashes, the Mississippi Company that was financed by the selling of shares to the public and listed in the stock exchange that partly contributed to the fall of overseas French Empire into the British hands, when this company crashed and facilitated the crisis in the France’s financial crisis, the British could still access public money via issuance of shares and borrowing money easily by issuance of bonds and at low interest rates to finance some of their overseas business enterprises and its empire. That’s how powerful joint-stock companies and stock markets have been and can be. Some of us probably have heard other seventeenth century companies which were financed via joint-stock and listed on stock markets.
Companies such as the London Company, Plymouth Company, the Massachusetts Company, the British East India Company or the famous Dutch joint-stock company Vereenigde Oostindische Compagne, or VOC for short that was chartered in 1602. VOC raised money from selling shares to build ships, send them to Asia, and bring back Chinese, India and Indonesian goods. It also financed military actions taken by the company ships against competitors and pirates. Eventually VOC money financed the conquest of Indonesia by the Dutch. So, the concept and idea of stock market and what it is capable of doing to people, companies, institutions, societies, ideologies and values and economies is as big and old as some of these historical moments indicates.
Admittedly, for us, as individuals and collectively, as private sector or public sector have not given this idea the necessary attention it requires. Because of our hesitant to embrace it, at family and private related businesses to public and state-owned-enterprises, resulted into most of our economic institutions being not inclusive. GDP has been at been growing at an average of 7 per cent p.a in these past few decades but does not correlate well with the efforts of poverty reduction. Economists would say this better, but for me — lack of inclusive ownership in companies operating in sectors that contributes largely to GDP growth may be one of the factors. We will continue…
The Impact of Reclassification to “Frontier Market” Status of the DSE/Tanzania
Last week, Financial Times Stock Exchange — FTSE Russell, a leading multi-asset global index, analytics and data provider published the results of its Annual Country Classification Review for countries monitored by its global equity and fixed income indexes. According to FTSE Russell’s Press Release dated 26th September 2019, Tanzania was upgraded from unclassified to Frontier Market status.
FTSE Russell went ahead to acknowledge Tanzania on meeting the requirements for attaining Frontier market status, congratulated us for market improvements implemented.
In this article, I would like to inform and help our stakeholders understand the impact of the reclassification (Upgrade) from “Unclassified” status to “Frontier Market” status of DSE/Tanzania Market.
To start with, this reclassification is a vote of confidence by FTSE that the capital markets of the Tanzania have made good progress.
But what does this all real mean?
Equity Markets Enhancement and International Standards
Earlier in January 2019 the Dar es Salaam Stock Exchange (DSE) achieved the Full Membership of the Word Federation of Exchanges (WFE) from being an Affiliate member for a two-year period. WFE being the global industry association for stock exchanges and clearing houses, headquartered in London. DSE’s graduation from an affiliate member to a full members was a measure of confidence by this global industry group which by itself was s follow up to efforts by the DSE to adhere into international set of standards and criteria, including: the recognized legal/regulatory framework; providing equal opportunity to market access by all types of investors; put in place efficiency mechanisms to admit and list securities and members in the Exchange; an adequate disclosures and market transparency tools; possessing an efficient securities trading, delivery and settlement infrastructures; good corporate governance framework and practices, independence of trading infrastructure and structures from that of settlements, these are among other factors.
And of course, there are other aspects of the market that are also scrutinized i.e. size of the market, rate of growth over time, types of listed instruments, market liquidity, size of investor base, number and quality of market participants – stockbrokers/dealers, custodian banks, settlement banks, etc.
Therefore, having achieved WFE membership, and other factors DSE was in a better position to achieve the Frontier Market status, admission and classifications criteria are relatively similar by both WFE and FTSE. FTSE Russell has 21 qualification criteria for its four-classifications ranging from: market and regulatory environment; to custody and settlement; into the dealing landscape; and lastly the state of derivatives markets. DSE met 11 out 21 criteria. In order to achieve a Developed Market status, one must meet all 21 criteria and for achieving Emerging Market status should pass at least 15 criteria.
Why Does Reclassification Matter?
The immediate expected benefit of reclassification will result from an anticipated increase in portfolio investment flows with the entry of foreign/global institutional investors and passive or index-tracking investors that will have to rebalance their portfolios to include Tanzania.
Typically, institutional investors are restricted to investing in developed, emerging and frontier markets, so the reclassification highlights the entry of a new class of investors into our domestic market, who previously were not there because DSE did not have visibility and profile to fit their investment criteria.
The increased exposure to international investment might also lead to an increase in initial public offerings (IPOs) – particularly if we all could see this as an opportunity, thus potentially leading to a much-needed deepening of the equity market in the country.
Improve Corporate Governance
The reclassification is likely to raise the bar in terms of corporate governance in the DSE. Foreign institutional investors will not be as complacent or inactive as domestic retail (and sometimes institution) investors.
Corporate governance rules need stronger enforcement and the timeliness and content of management and financial reporting needs a major overhaul to now include matters such as sustainability reporting and ESG (environmental, social and governance) reporting.
Reclassification is an opportunity for DSE listed companies to improve their corporate governance and investor relations in accordance with international standards, improve disclosure and transparency and comply with international reporting standards.
Build an Institutional Investor Base
Sound, well-functioning capital markets require a broad base of institutional investors to anchor markets. While this reclassification will attract foreign investors, they are not a substitute for domestic institutional investors such as pension funds and insurance companies, which typically operate as the backbone of a market. In recent days pension funds have remained dormant and passive in our domestic equity and debt market to the extent that only 4 per cent of their Assets Under Management is on listed shares, relative to their 20 percent benchmark.
As a country, we will need to consciously encourage and probably develop the regulatory framework that will facilitate building a domestic resilience on the backbone of our pension system and its assets as well as for the insurance sector. Why? Because, as it were – the role of both domestic institutional investors such as pension funds and that of Foreign Institutional Investors are simultaneously key to the success of the capital markets system. They both pump mobilized savings into the market, as they channel investments to the most rewarding sectors of the economy. But we need to understand that Foreign Institutional Investors trading behavior is so much influenced by the investment behavior of domestic institutional investors i.e. pension funds.
Currently, DSE’s market size, liquidity, price volatility and price discovery are heavily dependent on the flow of investment portfolio from foreign investors, meanwhile, the role of domestic pension funds in the market has been on a declining trend. So, much as this classification is envisaged to enhance the level of foreign investors participation in our market. However, in the medium to long run, as pension funds remain in other asset classes, foreign investors may also start staying away from the market, with significant impact in the market performance i.e. low demand for new issuances, and inactive local exchange.
