Finadium Research Report

Trading and Custody in Frontier Markets:
The Case of Africa

August 2008

Frontier markets now hold the last truly uncorrelated stock exchanges. These markets are still driven not by international capital flows but by local companies, national politics and a growing domestic middle class. Over the last 36 months they have averaged a 28% correlation to the S&P 500. Global asset managers are looking to the region with a new interest.

There are 56 nations with operational stock exchanges beyond emerging and developed markets. While some of these countries’ exchanges can not be reasonably accessed due to their limited liquidity and undeveloped regulatory environments, as a group they are large and growing. The S&P Frontier Markets Index of 24 exchanges has a combined GDP of US$2.1 trillion and a population of 476 million. Their population is younger than emerging and developed markets and GDP growth has averaged 5.4% annually since 2000.

Frontier markets in Africa are often accessible though complicated. We review trading and research in 13 frontier African markets primarily in sub-Saharan and West Africa. For investors wanting broad exposure, ADRs/GDRs, swaps, and several new ETFs traded in the US and Europe offer simple access. For serious investors, the best routes to market are through continent-wide brokers with local partners. Africa is not for the faint of heart however; costs are high, liquidity is low and stock prices fluctuate based largely on local conditions.

Custody and central securities depositories in Africa are growing. Nine frontier African markets currently operate central securities depositories with two more in the planning stages. Custody, a latecomer to these markets, is finally taking shape: a major custodian recently rolled out the first single point of entry system covering most of the continent.

Frontier markets have not only been uncorrelated to major indices, they have also produced steady returns in the face of a global equity market downturn. In the last year developed markets have averaged a return of –23% and emerging markets a return of –10%. At the same time, all frontier markets are up 7% on average and frontier Africa is up 24%.


This report is 42 pages with 29 exhibits.

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? Executive Summary
? The Last Uncorrelated Markets
– Frontier Stock Exchange Performance
? Global Frontier Market Economics and Demographics
? The Soft Dynamics of Frontier Africa
– Risks and Fears
? Trading and Research in Frontier Africa
– Trading Costs
– Exchange Liquidity and Mechanics
? Central Securities Depositories and Custodians in Frontier Africa
– Custody Providers
? Mauritius: A Case Study
? The Path to Emerging
– The Importance of African Regionalism
? About the Author
? About Finadium


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