Why Africa is missing out on the passive investment train: Passive investing investing tools including exchange-traded funds and index funds together comprise a USD 4.9 tn industry this year thanks largely to lower management fees, limited research required, and the inability of active managers to consistently beat indices. But Africa hasn’t cashed-in on the growth because African equities are hard to reach, with global investors having minimal exposure through passive investment vehicles. The London Stock Exchange Africa Advisory Group attempts to look at why in a report released over the weekend (pdf).

High transaction costs and lack of liquidity among top hurdles for lack of passive investing: African markets classified as frontier suffer from very high transaction costs, which are proving to be among the top barriers for passive inflows. These, coupled with lower liquidity, has created a vicious cycle of market withdrawals. Together with infrequent new listings, the result is that markets are attract few new inflows, which in turn starves trading — causing foreign investors to stay out and prompting valuations to drop, according to the report. Other barriers to passive inflows identified by the report include a lack of understanding among African stakeholders around the benefits of a country classification upgrade and limited research coverage of African equities.

How can African policymakers overcome these barriers? Governments must make an active push towards a classification upgrade by engaging with indices and funds, the report suggests. It also calls for regulatory changes that should bring down transaction costs, including reducing stamp duties and capital gains taxes.

LSE series on African capital markets: The report is part of a series of five reports on African capital markets, which you can check out on the landing page here. These are topics that in many ways hit close to home, as the various economic ministries and policymakers look at adopting similar or related policies. They are:

• Developing offshore local currency bond markets in Africa: The report (pdf) looks at how raising debt finance from larger offshore capital pools in local currencies is an attractive solution which mitigates an issuer’s currency risks associated with borrowing in hard currencies. Egypt had considered such a move, but decided against such an issuance in the current fiscal year.
• Developing the green bond market in Africa: Africa will require the continent to take advantage of green capital raising tools and sources of funding, especially as studies such suggest that the continent will be more severely affected by climate change than any other, according to the report (pdf). The government is looking to issue green bonds once the regulations for them are set.
• The challenges and opportunities of SME financing in Africa: The report (pdf) looks at how SMEs — which account for around 90% of Africa’s businesses and nearly 80% of the continent’s employment — can benefit from increased training and capacity building, a public register of companies, and supportive government policy.
• Trends in corporate information dissemination in Africa: This one is for all the investor relations managers out there, as the report (pdf) delves into the state of investor relations communications in Africa and how the timely dissemination of company news plays a central role in the efficient functioning of financial markets.