The relationship between
Date
2011-05-31
Authors
Mwiinga, Killian
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Abstract
Stock markets in Africa are small, underdeveloped and generally
undercapitalised by world standards. Until recently they have been perceived as
too risky to invest in by external investors. The “old” perception of Africa as a
“single country/block” is slowly receding and countries are starting to be viewed
as individuals, while not necessarily overlooking the issue of the contagion
effects of any regional business risks.
As has been observed, there has been generally improved market performance
in stock markets on the African continent in terms of historical average annual
returns represented by market capitalisation, market liquidity and number of
domestic listed companies over the period 1997 to 2007. However, this could
be due to many factors.
For countries to be attractive to external investors it is necessary to have
investor-friendly policies that protect their investments while creating an
environment that allows competition. In so doing, it is important to evaluate the
macro-economic and micro-economic policies that the respective countries on
the continent have. The sovereign credit ratings of countries are based on
economic fundamentals whose rating affects the ratings of many companies or
businesses in that particular country.
The purpose of this study was to gain insight into whether a relationship exists
between sovereign credit ratings and the performance of stock markets on the
African continent with respect to market capitalisation, market liquidity and the
number of domestic listed companies. As it would appear that the information in
this study has not been documented previously for the African continent it may
be regarded as a formative evaluation and addition to the body of knowledge of
the relationship between sovereign credit ratings and stock market performance
in Africa. The statistical analysis methodology was undertaken using
Spearman’s rank correlation method, which uses a t-test statistic within a 95 %
confidence interval to test the strength of this relationship and, based on this
result, a conclusion could be made. The findings of the research are intended to
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help countries in Africa evaluate their policies so that they become more
attractive to investors.
A window period of five (5) years, (1999 to 2003), was used to analyse the data
set for sovereign credit ratings. A similar, four (4)-year window period (2000 to
2003) was used for the comparison of the stock market indicators (market
capitalisation, market liquidity and number of domestic listed companies). It was
not possible to align the two window periods selected for the research as all the
data sets published lack information for certain years. However, it was felt that
as a trend – rather than an absolute correlation – was being sought, the validity
of the research would not be unduly jeopardised.
The result of the findings in this research was that there exists no relationship
between sovereign credit ratings and the performance of the stock markets on
the African continent with respect to market capitalisation, market liquidity and
number of domestic listed companies. It became clear that the performance of
African stock markets was influenced by factors other than an improvement or
worsening in the macro- and micro-economic fundamentals of a country.
The question remains: “What influences the performance of the stock markets
on the African continent?” This is an important area for further research.
The World Bank, through its implementing partner, the United Nations
Development Programme, needs to review its current programme to promote
stock markets on the African continent to see what areas require additional
focus for this project to receive the attention needed. Alternatively, it could be
that it is still premature to do so, considering that in 2007 only 20 countries had
stock markets.
Description
MBA - WBS
Keywords
Sovereign credit ratings, Stock market