Standard Bank: African markets attract global investors

As an original founding member of The Network Forum (TNF) Africa Meeting, Standard Bank participated in a number of panels and expos during this year’s virtual meeting. But what were the main talking points?

Key Points

– Fuelled by a combination of positive market reforms and the development of new investment products, foreign institutions are increasingly adding African markets to their portfolios.

– Africa’s reputation as a disruptor was cemented during the mobile banking revolution. The question now is whether the continent will be equally as disruptive with digital assets.

– Due diligence practitioners are looking for new technology solutions to support standardisation. At the same time, the industry is increasingly pivoting towards real-time risk monitoring.

– With the pandemic in retreat, financial institutions are making sure their operational resilience remains intact and well-prepped for any future crises.

Global Investors Venture into Africa

With investors struggling to etch out performance in low yielding developed markets, many are repositioning their portfolios towards Africa in the search for alpha. According to ‘World to Africa Investor Survey’ produced by Standard Bank and The Value Exchange, 44% of global investors have Africa exposures, while 76% intend to grow their Africa investments further. This is a trend being shaped by the continent’s attractive return potential.

Ten years ago, investments into Africa would have been overwhelmingly biased towards South Africa. However, this dynamic appears to be shifting as allocators increasingly rebalance their exposures towards other major regional markets including Nigeria, Kenya and Ghana. “While it is no surprise that the survey found South Africa and Nigeria to be among the most popular investment destinations, it is positive to see that investors are also looking at some of the other sub-Saharan African economies,” highlights Hari Chaitanya, Head of Custody Product and Investor Services at Standard Bank.

While Africa is attracting inflows, investors are conscious that the region does pose risks, and this can be a deterrent. Political risk, for example, is one such impediment. Senior Political Economist at Standard Bank, Simon Freemantle warns that even nominally stable markets, such as South Africa, are potentially vulnerable to volatility, especially with the looming ANC elective conference due to take place in December 2022.

The World to Africa Investor Survey also stresses that barriers such as market risk, currency controls, regulatory and legal uncertainty, FX liquidity constraints and market liquidity concerns are all serious obstacles. These are issues that Standard Bank is frequently engaging with local regulators and financial market infrastructures (FMIs) about.

“Africa presents a compelling opportunity for investors. However, it is not without its challenges. Industry participants are making inroads in addressing these challenges, but there is still a way to go. We need to focus on the changes that will make the biggest difference towards accelerating investor flows,” says Rajesh Ramsundhar, Head, Investor Services at Standard Bank.

Driving Inflows into Africa’s Capital Markets

With institutions pivoting towards Africa’s capital markets, regional FMIs want to address investors’ concerns by making the investment process as seamless as possible. Head of Equities at Standard Bank’s Global Markets business, Selvan Kistnasamy says regional integration initiatives, such as the African Development Bank-sponsored African Exchanges Linkage Project (AELP), could help remove some of the hurdles precluding cross-border investment, capital raising and initial public offerings (IPOs) in the participatory markets .

If successful, the AELP could unleash a wave of liquidity across these seven markets and beyond, as it will provide regional investors with greater exposure to a wider pool of investment products. For instance, some of the more mature African economies support derivatives trading, securities lending and securities borrowing, which are not necessarily available in all local markets. Schemes such as AELP will enable investors within Africa to diversify their portfolios, giving them access to new return sources and hedging tools.

As more global investors integrate environmental, social, governance (ESG) criteria into their portfolio decision-making, African markets are responding to the opportunity, according to Kistnasamy. In addition to imposing ESG disclosure requirements on publicly traded companies, several countries are launching their own green bond markets. In 2020, a Kenyan property developer listed a Shilling-denominated green bond programme on the London Stock Exchange .

Kenya is also in the process of developing a sovereign green bond, the proceeds of which will help finance various green projects. Adherence to globally accepted standards will be vital in supporting ESG investing in Africa, which is why a number of the continent’s leading stock exchanges have signed up to the UN’s Sustainable Stock Exchange Initiative. “Africa is rapidly emerging as an ESG destination for foreign institutional investors,” notes Chaitanya.

Africa takes the Lead on Digital Assets

Digital assets are generating interest in Africa. Tokenised securities, which are traded and settled on distributed ledger technology (DLT), could bring enormous benefits to Africa, not least by democratising the investment process. By fractionalising conventional assets (e.g., equities, bonds, private market instruments such as private debt) into bite-sized, digital units, the cost of investing will decrease. This will allow retail clients to construct their own tailored investment portfolios, but at much lower cost. By enabling for greater retail participation in capital markets, liquidity across Africa will increase.

Just as a number of African economies were at the forefront of the mobile banking revolution, Chaitanya told the TNF that several markets are also trialling central bank digital currencies (CBDCs), a digital equivalent of a country’s fiat currency. In addition to promoting greater financial inclusion in underbanked societies across developing markets, the use of CBDCs, together with StableCoins (i.e., a privately issued crypto-currency underpinned by a reserve asset like fiat money, a tangible asset or a commodity), could reduce frictions in cross-border payment and settlement processes, thereby generating cost efficiencies and mitigating risks, explains Ian Putter, Head of Blockchain at Standard Bank.

However, Putter warns that incumbent banks could see their revenues sharply decline if alternative payment rails do become more ubiquitous over the next few years. A failure to update legacy systems to account for the emergence of decentralised finance could spell problems for banks in the future. In response, remedial action needs to be quickly taken to avoid this.

Beyond tokens and CBDCs, experts at TNF say more investors are piling into crypto-currencies to generate returns and act as a hedge against inflationary risk. Not everyone is convinced that crypto-currencies are a good thing with one African-based central securities depository (CSD) describing them as nothing other than a speculative asset class.

Network Management – Constantly Evolving

Experts spoke at length during TNF about the status of the Association for Financial Markets in Europe (AFME) post-trade due diligence questionnaire (DDQ), together with potential technology solutions, and how these could facilitate standardisation in the network management due diligence process.

The AFME questionnaire has grown by 50% in size since its inception, and this is compounded by network managers issuing their own supplementary questions to agent banks on top of it. Head of Investor Services Information Management at Standard Bank, Sally Jacques says standardisation efficiencies diminish when there are too many redundant questions in the AFME DDQ, which network managers do not evaluate, or if multiple technology portals are used to issue the questionnaires.

“To address this, the industry could consider adopting a common electronic format for agent banks when submitting their DDQ responses. From a content perspective, there are several balancing acts that need to be achieved. These range from including additional questions on particular issues to reducing the supplementary questions versus condensing the questionnaire altogether, or having simple yes/no questions, which are easier to evaluate, versus the nuanced detail that network managers receive from commentary questions,” says Jacques.

With network managers’ organisations at different stages of the digital journey, a common approach is yet to be agreed on concerning how the industry could work together to eliminate manual processes and deliver real-time risk monitoring. Increasing geopolitical tensions and volatility are forcing network managers to embrace real-time risk monitoring and shift away from their traditional periodic due diligence approach. New technologies and the rollout of common industry repositories could play a critical role in supporting both network managers and their agent banks with real-time risk monitoring.

Post-pandemic Operations – Key Considerations

As financial institutions look towards a world beyond COVID-19, Group Head of Investor Services, Operations at Standard Bank, Chris Van Staden notes that a number of lessons around operational resilience have been onboarded. Coinciding with the Russia-Ukraine War, Van Staden says market participants are increasingly concerned about the potential risk of a cyber-attack on a critical FMI or industry utility, such as SWIFT.

Accordingly, clients are increasingly trying to reduce the number of points of failure which they have by consolidating service provider relationships. In network management, this has resulted in banks and brokers eschewing local providers in favour of regional banks who can support multiple markets from a single hub. Van Staden also highlights that investment firms are increasingly outsourcing operations and technology to specialist providers, including custodians, as they look to build up economies of scale and enhance their own operational resilience.

Standard Bank Group is the largest African bank by assets with a unique footprint across 20 African countries. Headquartered in Johannesburg, South Africa, it is listed on the Johannesburg Stock Exchange, with share code SBK, and the Namibian Stock Exchange, share code SNB.