Financial ExpertSpeak: Slow but steady shift from traditional to frontier markets
The CEO of the Stock Exchange of Mauritius opened up to AfricaMoney on what makes Mauritius such an attractive market for foreign investors.
Sunil Benimadhu, CEO, Stock Exchange of Mauritius, opened up to AfricaMoney on what makes Mauritius such a magnet for foreign investors. Our financial expert took us through the journey of the SEM last year, covering topics as varied as the SEM’s capital drive in 2013, on one hand, and how the SEM’s Sustainability Index can be expected to power Maurice Ile Durable (MID), on the other.
Edited excerpts from the interview:
Foreign investors currently account for about 40% to 45% of the daily trading volumes on the exchange. Can you elaborate on the reasons behind the interest shown by foreign investors in the Mauritius market?
I think that the solid earnings growth of many of our listed companies over the years has been one of the compelling factors driving foreign investor interest for our market. Further, the recognition of the SEM and of the CDS at the international level also gives them the comfort of investing in our market. The successful growth strategy pursued by Mauritius during the last three decades also makes the country, as well as, its stock market an appealing investment destination for investors looking for attractive returns outside of the traditional markets. Finally, I think we are witnessing a slow and yet irreversible trend in the shift of asset allocation from the traditional markets to the high growth frontier markets like Mauritius.
The SEM had a good run in 2013. What are the main factors which spurred on increased issuance, especially bonds?
Listed companies are increasingly using the SEM’s platform to raise long–term capital in the form of equity or debt financing. In 2013, about Rs 23.2 million have been raised by companies listed on the Stock Exchange through new issues of stocks, rights issues and bonds issues. Several factors have spurred the capital-raising momentum on the SEM. The strong performance of the market in 2013 on the back of the solid performances of some bellwether stocks have made capital-raising easier for the listed companies. On the equity front, listed companies have also resorted to capital-raising to fund their expansion initiatives, on the one hand, and strengthen their balance sheet through deleveraging, on the other hand. The low interest rates obtainable on bank deposits and other similar instruments has facilitated capital-raising through the issue of bonds.
What is the expected impact of the significant, 88% reduction in total brokerage fee from 1.25% to 0.15% in turnaround trades? Is the impact already making itself felt since the reduction came into effect last month?
The substantial reduction of fees on turnaround trades aims at improving the competitiveness of our platform, enhance trading liquidity overtime and improve the attractiveness of the SEM as a listing and capital-raising platform. Since the introduction of the new fee structure for turnaround trades, the number of turnaround trades has been increasing. There is still an important sensitization campaign that brokers should undertake with their clients. Turnaround trades are also contingent on market conditions and tend to be more prominent when markets are on the rise.
As one of the few exchanges in Sub-Saharan Africa to be a member of the World Federation of Exchanges (WFE), what does this elite membership entail and how does the SEM leverage this distinction to attract more investments?
The attainment of Membership status of the World Federation of Exchanges (WFE) in 2005 indeed constitutes an important milestone that has enabled the SEM to join the league of stock exchanges that are compliant with the stringent standards and market principles established by the WFE. The WFE is a central reference point and standards setter for exchanges and the securities industry in the world. Membership identifies the SEM as having assumed the commitment to prescribed business standards, recognised as such by users of exchanges, as well as by regulators and supervisory bodies. This has led to 2 further recognitions:
In March 2010, the SEM was designated by the Cayman Islands Monetary Authority (CIMA), an Approved Stock Exchange by virtue of its membership of the World Federation of Exchanges for the purposes of CIMA’s Mutual Funds Law, Banks and Trust Companies Law, Insurance Law, Companies Management Law and Securities Investment Business Law. The CIMA recognition undoubtedly raises the profile of the SEM as a well-structured and properly regulated Exchange and enhances SEM’s position as an attractive Listing venue for global and specialised funds. With effect from 31 January 2011, SEM has also been designated by the United Kingdom’s Her Majesty’s Revenue and Customs (HMRC), as a ‘Recognised Stock Exchange’ under section 1005 (1) (b) Income Tax Act 2007.
These international recognitions are important as they comfort both local and international investors that the SEM is a well regulated exchange and adheres to international standards. They also enhance our attractiveness as a listing, trading and capital-raising platform. They have also opened up the space for the SEM to move up the value-chain of products listed and traded on our platform. Furthermore, some jurisdictions would only allow their institutional investors to invest in the securities of a stock Exchange which is a member of the World Federation of Exchanges.
One of the objectives of SEM’s reform agenda is to shift from an equity-centric domestic exchange to a multi-asset class international exchange. What are the steps being taken to make this transition?
Since 2010, the SEM embarked upon a fundamental reform program with a multi-pronged strategy of steadily moving away from a domestic-equity-focused Exchange to a multi-product-internationally-focused Exchange.
We have implemented a number of fundamental reforms, including amongst others, the implementation of a multi-currency listing, trading and settlement platform, a fundamental review of our listing rules to cater for the listing of a wide variety of company and fund structures to internationalise our listing and trading platform and give the SEM the ability to trade different asset-classes including equity products, debt products, ETF’s, commodity based ETF and eventually derivatives. The results have been forthcoming as the last four years have seen the listing of a growing number of international products on the Exchange.
SEM has been voted the most innovative Exchange in Africa in 2011 and 2012 by Africa Investor. Could you highlight some of the main innovations that have led to this distinction?
The Stock Exchange of Mauritius (SEM) won the Africa Investor’s “Most Innovative African Stock Exchange of the year Award” in 2011 and 2012. The Award was given on the basis of a number of criteria, including, amongst others, initiatives implemented by the Exchange to embrace new areas of development, programmes in place to enhance the services it provides to its key stakeholders and compliance of the Exchange’s regulatory and operational set-up with international standards.
This Award for the second consecutive year comes as recognition of the numerous initiatives taken recently by the SEM to scale up its activities and move up the value-chain of products and services it offers. Some of these innovations can be summarized as follows:
•The introduction of a multi-currency listing, trading and settlement platform that allows issuers to list and trade their securities in USD, Euro, GBP and ZAR and settle the underlying transactions in these four international currencies.
•The implementation of competitive rules to cater for the listing of a wide spectrum of Global funds including, amongst others, specialised funds, professional funds, real-estate funds and other focused fund structures.
•The adoption of competitive rules to attract the listing of Global Business Companies on the Exchange and use the Exchange platform for capital-raising. Listing Rules have also been introduced to cater for the listing and trading of specialist debt-instruments targeted to qualified institutional and retail investors.
•The introduction of depositary receipts rules targeting African issuers that wish to raise capital from international investors.
Mauritius is one of the few nations in Africa to have not one, but two exchanges in the form of SEM and Bourse Africa. In this context, can you highlight the role of capital markets in addressing the significant infrastructure deficit in Africa and how Mauritius can lead from the front?
Africa has embarked on a process of economic transformation. This process has seen solid and sustained growth over a decade. Africa still has massive infrastructure needs. It invests only 4% of its GDP in infrastructure. Bridging the infrastructure gap could increase GDP growth by an estimated 2 percentage points a year.
Africa’s current and future growth (GDP growth of over 6%) is expected to be underpinned by massive sectoral investments – infrastructure development, Agro-business, consumption, telecommunications, mining and so on. Private and Public sector entities in Africa will require funding to support their growth requirements. To sustain the current level of economic growth and encourage both domestic and foreign investment in the continent, Africa is rapidly expanding, developing and modernizing its financial markets. The deeper, broader, and better functioning of financial markets can stimulate economic growth.
Stock Exchanges in Africa can provide centralised and organised platforms for these private and public sector entities to raise capital to fund their future growth. Asset allocation at the international level is growingly shifting towards emerging and frontier markets. African Stock Exchanges are expected to benefit from this asset allocation shift and witness increased portfolio flows from international institutional and retail investors. A number of private equity funds have been created to invest in big projects in Africa. Private Equity as well as dedicated Africa funds to invest on Africa’s Stock Exchanges have been on the rise and will gain increased momentum in the coming years.
At the SEM, we see a lot of opportunities in the wake of Africa’s rising. We will capitalise on Mauritius’ excellent position as a gateway linking US/Europe/Asia to Africa and position the SEM as a capital-raising, listing and trading platform for Africa-focused ventures.
Budget 2014 commended the SEM’s move to introduce a Sustainability Index showcasing listed companies promoting sustainable development. Also, a Social Impact Exchange is to be promoted to encourage investments with positive social or environmental impact. How are these initiatives progressing?
At the level of the SEM we have noticed that many leading listed companies have been at the forefront of the sustainability initiative and brought their own contribution to the “Maurice Ile Durable” vision. In order to bring our own support to these companies which are already actively pursuing sustainability initiatives, and with a view to encouraging Mauritian companies in general to follow suit and embrace such initiatives, the SEM has been working in collaboration with the Commission on Maurice Ile Durable (MID), the Board of Investment (BOI) and the Joint Economic Council (JEC) in order to develop a Sustainability Index. This Index will showcase those sustainability champions which are listed on the Official Market and on the Development & Enterprise Market.
As part of the groundwork for the Sustainability Index, the Mauritius Sustainability Index Supervisory Committee, which consists of representatives of the SEM, the Commission on MID, and the BOI, as well as independent experts in the different spheres of corporate sustainability, has established the Ground Rules for the management of the Index, as well as the sustainability assessment methodology. The Committee is now finalizing the sustainability criteria for measuring the sustainability performance of participating companies. We have also engaged with some of the leading listed companies to gauge their interest in the project. We will go ahead and implement the project only if we have a sufficient support from the listed companies and if the number of companies meeting the sustainability criteria is sufficiently important to justify the creation of a meaningful index.
With regard to the Social Impact Exchange, we are working with IIX, a Singapore-based company, to leverage on their expertise in the field to attract issuers and investors to our market. This is a long-haul project that may take some time to materialize.