Why Retail Investing Revolution is catching up in Africa

The pandemic has disrupted many businesses which left millions of people turning towards new avenues to find a source of income. Millions of tech savvy young people in Africa have turned to investing & trading in the financial markets.

The global stock markets & crypto market have gained trillions of dollars in market cap since the start of Covid-19 pandemic. Since the global financial markets crash on March 2020, there has been massive influx of first-time investors & traders in stock markets, indices, forex markets, cryptocurrency markets.

In Africa, Crypto Trading app Luno reported that it’s number of users increased from 2.3 million in January 2020 to 7 million in April, and 8 million in June 2021. This counts to a 247% increase in the number of wallet users. Around 5 million of these users are from Africa, with 30% from South Africa.

Another research by Forex Brokers South Africa indicates that the major regulated CFD brokers in the region which include big brokerages like Exness, Hotforex, Tickmill, IG Markets have recorded as high as over 100% increase in their CFD trading volumes, net trader deposits & the number of new customers.

Young retail Traders in Africa are increasing using social media to connect with other retail traders. These traders are mostly investing in cryptos, US stocks & Indices.

To simply put; access to cheaper data & smartphones, lower barriers to entry, and global financial markets going viral have been the major drivers for higher participation by retail traders in Africa. But how are the regulations catching up, and what are the implications for traders in Africa?

 

What are the Reasons for the growth?

  1. Mobile led Trading growth

There was a time when investors had to telephone their brokerages for investing in any financial market.

The barriers to entry were so high that only high-income individuals & professional investors had access to these brokerage services.

But in the last two decades, new group of brokerages have been created that allow anyone with a smartphone to invest in the markets, with very low barriers to entry. This has led to rise in ‘Retail-traders’ in the financial markets.

In Africa, most of the growth in retail trading has come from young traders using mobile investment apps. In the recent 3-4 years there has been huge investments in the Fintech sector in Africa, including in the retail Investments & trading sector.

Many well-funded trading apps have obtained licenses to operate the region, mostly in South Africa & Nigeria, and all of them have taken mobile-first approach, with simple & clean platforms to allow easy investing with just a few clicks.

 

  1. Race to Low Fees & minimum deposit

Most trading platforms in Africa used to charge very high trading fees & the minimum deposit requirements were also what only few could afford.

There also used to be many extra brokerage charges like withdrawal fees, transaction fees, trading fees, conversion fees etc. This meant that only a few investors would participate in the markets.

But the African financial markets have developed in the recent years, which has led to growth in the number of electronic trading platforms competing for the users. As the number of users have grown, the costs have gone down significantly from what they used to be 2-3 years back.

There are several US based investing apps like Robinhood that have shifted to a zero fees model for trading on their platform; while earning from order flow data. Platforms in Africa have also come a long way from high fees to nearly 0.1 % to 1.0 % fees now, such as Luno, Easy Equities, Hotforex, Chaka, Bamboo; and minimum deposits of as low as $1.

Extra fees like deposit/withdrawal charges, exchange fees etc. are now reduced to zero at most retail trading platforms in Africa. This means that even more users are attracted because of the low barriers to entry.

 

 

  1. Covid-19 Lockdowns & market volatility

The spread of Covid-19 crushed the market in March 2021 last year. Many people saw this as an opportunity to buy stocks & cryptos for cheap.

Many remembered the crash in 2007, and how the markets surged back to all-time highs with a solid decade long bull run for US equities market; people who missed that rally saw this as another opportunity to buy cheap. With the rate cuts by US Fed & other Central banks, and stimulus in the economies, the markets did rally.

Major African stock markets JSE & NGX have also rallied over 100% since March 2020.

 

  1. Currency Devaluations

Unlike most countries around the world, African countries don’t enjoy the advantage of having a stable domestic currency.

As a result, the people don’t want to store their wealth in their local currencies fearing devaluation. This has led to many people in Africa to invest in Cryptos instead of saving in local currencies.

With crypto wallets becoming easily accessible, cryptocurrencies, mostly Bitcoin has gained a large following from young people in Africa for storing money.

Bitcoin has appreciated nearly 700% since 21st March, 2020, while the currencies such a the Nigerian Naira has been devalued significantly during this period. This has led to many young tech savvy Nigerians to use Bitcoin for storing their money.

 

What are the Challenges for Retail Investors?

  1. Regulatory Hurdles

Many African countries have been trying to regulate the retail investing industry, mostly the crypto space & apps that allow investing in foreign stocks.

Some market regulators in countries like Nigeria have even put blanket ban on Cryptos, and have also crackdown on investment platforms that allow trading of foreign stocks & issuing warnings to general public against these platforms; with an attempt to make brokers abide to the rules of the SEC in Nigeria.

The main problem cited against the use cryptocurrencies is that it has been subject to money laundering & contribute losses for the economy. This is why governments around the world are vary of the crypto market. As this is such a new space, it’s very hard to formulate laws that will balance the interest of the governments, investors as well as the brokerages.

In case of the investment apps that allow trading foreign stocks, the major argument against these is that such apps could pose a risk to the country’s foreign reserves & the economy if general public start to invest aboard instead of local stock markets.

Major African countries like South Africa have attempted a different path & are trying to regulate the cryptos & alternative financial instruments.

Governments working around a framework would certainly be good for the millions of retail investors in Africa. Investors & general public who are trading in an unregulated environment are more at risk of being targeted by scammers.

 

  1. Concerns of Investor Safety & the Risk of Capital Loss

The crypto market is known to be volatile that even a small tweet by a celebrity can change the value of coin and make the market crash.

A good example of this was when Elon Musk called DOGE coin a ‘hustle’ on social media, this crashed the price of DOGE coin and caused losses to a lot of retail investors. Since cryptos are not backed by anything physical & are driven by investor sentiments, any news or a tweet could affect the price of a crypto.

Cryptos like Bitcoin, Ethereum & others have lost more than 50% in market cap in the last 2 months from highs.

While some early traders & investors in Africa have benefitted from investing in the markets during the start of the last year, but traders who entered this year near the highs have lost money.

Since cryptos are extremely volatile, this poses a huge risk to traders.

 

What the Future Holds?

As the investments in the Fintech sector in Africa grows, more & more people will have access to new & alternative financial instruments.

The financial markets in Africa need more regulations quickly as more & more people are investing into cryptos, CFDs, indices & stocks. If a large market crash happens and people lose their money, it can badly hurt the African economies.

How the retail investing & trading industry in Africa will develop would be interesting. But, the retail investors & markets in Africa could benefit from clearer legal framework & regulations.

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