An Examination of the Inter-relationships Between and Gains from, Investing in African Emerging Stock Markets

  • Justin Hof

    Student thesis: Doctoral ThesisDoctor of Philosophy


    In recent years there has been a significant increase in the flow of investment into emerging equity markets. The low return correlations between this class of stock market and developed equity markets has allowed global investors the opportunity to earn higher portfolio returns while at the same time reducing overall portfolio risk. The investment climate in emerging markets has improved vastly and many of these countries have experienced superior rates of economic and capital market growth and, increasingly, they are contributing to global trade and investment. Emerging capital markets are now recognised as a distinct investment class and have become an essential component of any global investment strategy. Until recently, African stock markets were not considered as mainstream investment opportunities. However, in recent times there have been widespread structural and economic improvements in many African countries and they have sought to attract foreign investment. These changes have resulted in impressive economic and capital market growth; African markets are now becoming recognised as a legitimate investment destination and capital flows to these countries are beginning to increase.

    This thesis attempts to shed light on the potential of these newly emerging African stock markets to offer UK investors the opportunity for international portfolio diversification. The analysis begins by conducting a Johansen cointegration analysis and Granger causality tests to examine the inter-relationships between African markets and the UK, in order to determine their time-varying potential for investment. The results of this analysis suggest that stock markets in Africa are weakly related to that of the UK and that opportunities for diversification could be significant.

    The second part of the thesis builds upon these results and investigates the magnitude of the risk-return gains available from investing in African stock markets. In so doing, the analysis seeks to examine, on an ex-post basis, whether a sample of African equity indices might have offered higher returns for relatively lower levels of risk as compared to a UK or World index only portfolio. The results of the analysis reveal that African markets can offer a UK investor risk-return gains that are significantly greater than those available from investing solely in the domestic market. This finding applied to all periods examined.

    The final section in this thesis examines the gains available in African stock markets on an ex-ante basis. In particular, various forecasting techniques are employed in order to assume the conditions under which investors operate. Creating portfolios based on historical data and comparing the results to the theoretical gains available, the study analyses the predictability of returns in African stock markets. The findings from this ex-ante analysis suggest that it may be difficult for UK investors to achieve the theoretical gains available from investing in African stock markets.
    Date of Award2014
    Original languageEnglish
    SupervisorSuzanne Fifield (Supervisor), Bruce Burton (Supervisor) & Nongnuch Tantisantiwong (Supervisor)

    Cite this