S&P Dow Jones launches Indices for Africa – the cornerstone for global investors

Today the S&P Dow Jones Indices launched what it calls ‘the deepest and most extensive suite of African equity indices currently available to investors.’ Fourteen new equity indices covering thirteen African markets were launched, providing investors in Africa, as well as those outside, with a comprehensive offering of indices measuring the performance of the African equity markets. The headline index launched today by SPDJI is the S&P All Africa, a benchmark for the African continent. The Index combines the constituents of the S&P Pan Africa, S&P South Africa Composite, and S&P Zimbabwe BMI, as well as developed market listed companies that operate purely in or derive a majority of their revenues from the African continent. Alec talks to Alex Matturri CEO of S&P Dow Jones Indices, and Zack Bezuidenhout Head of S&P Dow Jones Indices in SA and Sub-Saharan Africa – they discuss the launch, liquidity in Africa and growing new market opportunities in the world’s most exciting growth story. – LF 

 

 

ALEX MATTURRI:  This is my second trip here.  Ever since we met Zack about a year ago, we were able to hire him.  It’s been a great run so far for us here.

ALEC HOGG:  You certainly are making waves in the South African market.  Was this intentional?

ALEX MATTURRI: Absolutely.  We see a lot of opportunity in this market.  We saw lack of product.  The competition versus some of the local indices is healthy, but we’re also bringing some new ideas to the marketplace in trying to open up the African market, whether it be Greater Africa or South Africa, to global investors.

ALEC HOGG:  Africa market opening up is music to most people’s ears on this continent.  Why is it important that you have the kind of initiatives that you announced this morning?

ALEX MATTURRI:  Well, we see indices as a way to open up markets for global investors.  We play in many of the marketplaces now and there’s a lot of demand for information around investing in Africa and really, a lack of product out there.  It’s surprising how little people know about it.  We think that launching indices, both here in South Africa as well as on a Pan-Africa basis, will help bring global investors into these local markets.

ALEC HOGG:  Zack Bezuidenhout, how big is the African equity market when you exclude South Africa?

ZACK BEZUIDENHOUT:  It’s extremely small, actually.  Just looking at our all-Africa index, South Africa still represents about 87 percent of that.  The offshore component, which we in include in the index too, is also a five percent chunk.  Once you strip out South Africa and the offshore securities, there is about a ten percent exposure to the rest of Africa that you can pick up when you only look at Africa.

ALEC HOGG:  Is there enough liquidity there?

ZACK BEZUIDENHOUT:  Certain securities do show liquidity.  One of the things we’ve done is to try to find those companies within the various regions and create indices – liquid indices – that could potentially be used for structure products and ETF’s for each region.  That’s one of the new things, which we brought out this morning.

ALEC HOGG:  Alex Matturri, from a global perspective, is this your fledgling market?

ALEX MATTURRI:  Not at all.  I think we currently have operations in 17 or 18 different countries.  One of the roles we see ourselves playing is to help bring information flows, both to the global marketplace about Africa, and to bring global investors into Africa, so this is just another part of our global expansion strategy.

ALEC HOGG:  What happens from here, though?  Do asset managers now see the indices and start offering product on it?

ALEX MATTURRI:  Locally, yes.  Part of Zack’s job is to introduce the local asset managers: to induce them to create products, funds, potential ETF’s, as well as some of these indices – both equity and fixed income.  What we then do is we’ll take these same indices globally to some of the major product issuers who are looking to create products, to gain access to some of these markets.

ALEC HOGG:  Is there interest in the Africa story?

ALEX MATTURRI:  Absolutely.  People look more and more away from the traditional markets.  They look for uncorrelated returns, and look for the next new thing.  As you pointed out, the markets are still small.  Many markets in Asia started out that way many years ago.  We’re doing the same thing in Latin America.  Investors nowadays really are looking all over the world for investment opportunities.

ALEC HOGG:  I remember Rupert Murdoch being quoted a little while ago, as saying that Africa today reminds him of Asia.

ALEX MATTURRI:  It could be.  I was just getting into the business back then.  The sophistication level of the investors here in the country, whom we met with, is quite high and that’s encouraging.  They understand the marketplace.  They understand the global marketplace.  We think that over time, as some of the capital constraints are eased up and local investors will be able to invest more outside of Africa, we’ll also be able to play a role there.  Initially, our efforts are really in trying to get foreign investors to come and look at these markets and look at them, as Zack mentioned, from an investable product standpoint.  We have a long history of creating indices for investment products, whether they be ETF’s, traded derivatives, or structured products.  You build those indices differently, as you pointed out.  You need to build them around liquidity because some of these markets don’t have the available liquidity that you would in Europe, Asia, or even Latin America.  You can still build indices that give people that sort of exposure if you understand how to make liquidity an important component of the index.

ALEC HOGG:  Zack, we know South Africa has a deep capital market by African standards.  When you travel elsewhere in the continent, at what stage of development are they?

ZACK BEZUIDENHOUT:  Nigeria’s definitely behind South Africa as the next exchange and where liquidity is increasing.  In regions such as Ghana, there are only about two securities that you can say are liquid enough to trade in; in Kenya, there are about seven.  There are quite a few securities listed on these exchanges, but you’ll see there are only a few that really trade.  You can probably compare that to the 150 we cover in South Africa and say ‘well, some of those don’t even get close to the liquidity of the smaller security in South Africa’.  There is however, sufficient security per region, which we try to pick up and incorporate into our indices.

ALEC HOGG:  Is there a danger though, with limited liquidity, that you could have some desk jockey in New York with lots of ammunition manipulating the indices?

ZACK BEZUIDENHOUT:  It’s not really manipulating the indices, as probably manipulating a fund or a security included in the index or on the exchange.  That’s really going to affect anybody who invested in that security.  It’s not just going to be effected.

ALEC HOGG:  But how do you guard against that when putting your indices together?

ZACK BEZUIDENHOUT:  It’s not really something that we can control at all from our side.  It’s really the regulators and the exchanges’ rules that they need to put in place of how people can trade those securities.

ALEC HOGG:  What I’m getting at is you do cap each individual equity in the indices you’re putting together, particularly in these illiquid markets.

ZACK BEZUIDENHOUT:  Yes, some of the indices we created are capped indices, where we capped countries, sectors, and securities within the index.  It’s really to broaden the diversification and the exposure that an investor would get when they invest into a product that is based off these indices.  Therefore, you’re not overly exposed to one single company when investing into these indices.

ALEC HOGG:  If I look at the backdating Alex – and let’s just say the East African index, which is now primarily just Kenyan stocks/Ten stocks – and I want to invest in it, how do I go about that?

ALEX MATTURRI:  Well, that’s really a function of the local brokers being able to provide that liquidity, product issuers being able to create, albeit an actively managed fund, a passive tracker fund or a structured product, you have to start some place.  It’s important that you make the indices available because it brings attention to the marketplace.  If you go back, when the IFC first developed the first emerging markets indices, which we now control…  There efforts are really to bring attention to these marketplaces, and we continue taking that role very seriously.  With our experience in building these indices from liquidity, as you mentioned, we’re not in the business of being police to markets from a manipulation standpoint.  We are, however, an independent index calculator.  We have governance that looks at modifying the methodologies around our indices.  As liquidity improves or if we see things happening, our index committees can have judgment over managing these indices.  These are rules-based indices, but the rules have to be modified over time to consider these factors.  As liquidity shifts, as rules change within an exchange, as ways of gaining access change from a regulatory standpoint, we consider those factors as we continue to manage these indices going forward.

ALEC HOGG:  Where do you expect the most support is going to come from, from a product designer perspective?

ALEX MATTURRI:  Well, ETF’s are an area where we’ve seen tremendous boom globally.  It’s still very early days here in South Africa.  There are only a handful of products, but the Exchange Traded Fund has really revolutionised the way people can access some of these indices.  You could list a product here that becomes available for foreign investors, who come in, it’s a product structure that they feel comfortable with, so that’s one of the natural ways you can access some of these products.  In addition, there’s an entire liquidity pool, which is built around that because the ETF’s offer a certain amount of arbitrage ability.  That’s one of the places where we can see some of these indices being used initially.

ALEC HOGG:  Can you see the South African market taking to this though, rather than the New York or London areas?

ALEX MATTURRI:  I think it’s still early days here.  You still need more education.  I think the exchange should play an important role in educating the marketplace about Exchange Traded Funds.  We feel that it’s part of our mandate to try to explain the indices themselves.  We’re certainly not a product issuer.  I think that over time you could see Exchange Traded Funds getting more traction here.  Certainly, they’re up against entrenched competition and the existing ways of doing business, but we’ve seen the same thing happen in the U.S., Europe, Asia, and other markets.  Again, it just takes time for natural development in markets to happen here.

ALEC HOGG:  Zack, certainly the ETF’s in South Africa have been getting an ever-increasing share of the market from five/ten years ago, when there was only Satrix.  Now, we have a flood of them.  You haven’t hurt with the deal you did with Grindrod, which was very interesting.

ZACK BEZUIDENHOUT:  Grindrod created two ETF’s on the back of our low volatility indices, as well as our Dividend Aristocrats indices.  Those are available and our investors can access that through their brokers.

ALEC HOGG:  What has the demand been like?  You launched that a couple of months ago.

ZACK BEZUIDENHOUT:  Yes, it’s a couple of days ago, actually.  It listed on the 14th of April, so it’s almost a month now.  The pick-up there is quite good.  I think Grindrod’s also planning to take a global roadshow and introducing the ETF’s to some global investors looking at accessing Africa.  Hopefully, they’ll be successful in gathering some assets in that.

ALEC HOGG:  And those will primarily be South African underlying assets/stocks.

ZACK BEZUIDENHOUT:  Yes, the ETF only looks at the South African stocks.  Some of the dual-listed securities will still be included in there, for example Old Mutual and Billiton etcetera.  Again, it’s focused on the South African market and South African equity exposure for anybody who is interested in a low volatility approach or a Dividend Aristocrats.

ALEC HOGG:  Is there more to develop, in the African market from the indices, which you launched today?

ZACK BEZUIDENHOUT:  The other thing we launched today was on the fixed income side, and it’s definitely in the rest of Africa, fixed income is still a big way of investing.  For example, Nigeria and Ghana: about 80 percent of all investments go into the fixed income space.  With listing and launching our Sovereign Bond, Nigerian, Ghanaian, and Kenya indices, and our Africa Sovereign Bond indices will definitely see some investors looking at those indices quite closely.  Perhaps in the future, they can combine our equity indices with our Sovereign Bond indices, and create multi-asset class or balanced-type fund products.

ALEC HOGG:  Alex, as you said, you have to start somewhere.  This is a step in the right direction for the continent.  With your long experience in this industry, if you step back is there any parallel with another point in time for any other area in the world?

ALEX MATTURRI:  There are 100 parallels.  The development of markets takes many years.  If you look back at even something as recent as the ETF marketplace when they first started launching in the U.S., it started with one product.  It took many years before it really caught on.  One of the things I’ve noticed as I’ve travelled through many of these markets is that the timespan is much shorter nowadays than it was.  We took ten years in the U.S.  We’ll maybe take five years here in South Africa.  Again, the people learn from these other markets.  They learn what works and what doesn’t work.  There are sources of information for product issuers who talk to people in these other markets that have had experience in how to build liquidity and how to make sure the market is educated – so yes, we’ve seen the same parallel in many markets.  Asia in general, is going through a similar revolution.  Their market is becoming more open and investors become more sophisticated.  Here in South Africa, you have a good core of sophisticated enough investors that could start using these products as they become available.  As people become educated on these products, how to use them properly, and how to understand the indices themselves, our role in terms of educating the market will continue.  We’re not going to just launch an index and walk away.  The fact that we have a local presence and are able to provide content into the marketplace, albeit methodologies or research around these indices as part of our general expansion of the business.  We think that those will help in South Africa.

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