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.

The Effective Dispersal of Ownership of Capital

The history of financial capitalism is to a large extent a history of deliberate government policies to disperse financial interests among the majority many in its economy, that is to disperse ownership across a wider segment of the population as the process of economic and financial inclusion as well as wealth creation. Such policies have helped democratize finance to many developed economies and emerging economies. Most developing economies are still in the nascent stage of this process.
People seldom realize to what extent that we live in a society that is structured by financial design to become better and better over time, and so the role of finance in creating a good society cannot be overemphasized.
In spite of the above, it also true that modern market economies seems to many observers increasingly to be run by a relatively small number of business, financial and investment leaders who are, by virtue of their financial and general business savvy, hold excessively influence on how matters of finance and its role in promoting economic growth and development is being pursued.
For us, with our history of socialism/communism, which similarly sought to equalize ownership of economic assets and interest, despite the change we made in pursuing our development via market based approaches; that previous system had control over property/factors of production, if not the actual ownership of rewards of factors, which are centralized in the government. But, as we knew it this centralize model has been falling out of favor around most parts of the world (except the recent trend), since such centralization of control does not allow people to use their diverse information, enterprise skills and innovations to actively direct the use of factors of production, including capital.
The above points towards the concept of an ownership society, referring to a society in which citizenship and responsibility are encouraged by the widespread ownership of and control over factors of production and essentially individual properties.
As we can learn this idea of ownership of capital can easily be related to ownership of land and homes – when agriculture constituted the bulk of nations product, policies to disperse ownership of capital were concentrated on land. Many governments had policies that encourage individuals living in rural areas to own farms, there were also policies that encourage urban individual home ownership – which still happens to this day in most economies.
However, such policies have discouraged the development of big companies that might have operated rental properties for the general public. Instead we have a substantial house owning population in many countries, developed, emerging and even developing countries. But this did not happen by accident – let consider the brief history into it.
The concept of property-owning democracy was developed in the UK since 1920s into the 1970s with a program to privatize and sale government owned houses to their renter inhabitants.
In recent case China, with its communist ideology, came later to the ownership society concept. China government eventually made, and still makes homeownership a priority among its population. So, the idea of encouraging homeownership seems to be popping up everywhere. Now, as it were, homeownership, in contrast to land ownership or stock/share ownership, does not usually directly involve people in many specific businesses. But it has been widely thought of as helping to create a market-oriented psychology that encourages other kinds of factors of production, specifically property ownerships well, and as encouraged a feeling of participation and equality in society. Under such circumstances it is apparent the ownership of stocks and bonds that contributes to a feeling of participation should be pro-actively encouraged by the state.
A real sense of participation in society and the economy may be promoted more broadly by policies that encourage more business and companies-oriented ownership, notably ownership of broad portfolio representing the real productive assets of the country. Now this can be executed using different approaches and strategies. For example, Singapore is known to lead the way to an ownership society with its central provident fund, which is a mandatory saving plan for its citizens, with both employers and employees contributions which allowed them to purchase both local and international shares and bonds and also housing to their members. It is being said that people who have substantial savings and assets have a different attitude towards life. And, so are many other nations.
These such policies are efforts to democratize and humanize finance, to make finance serve the people and to encourage people to consider themselves participants in a society built on the principles of finance.
To conclude – here at home we tried these policies during privatization, unfortunately just under 100,000 people participated directly in the ownership of the only seven entities that were privatized via issuance of shares to the public and listed in the DSE. We also have less than seven percent of our population that have indirectly invested in the 15 listed companies via their contributions in pension funds. As it stands, we are yet to make a dent into overall approach to democratize finance, creating an inclusive economy, and achieving economic empowerment for many in our society. So, what if we privatize a few more entities via the local stock exchange, what if we encourage supplementary pensions schemes, what if we encourage more collective investment schemes and independent fund managers, and what if we encourage more private companies to access public money in their capital raising strategies? Would we be closer to our ideals?