Stock markets in Africa are small, underdeveloped and generallyundercapitalised by world standards. Until recently they have been perceived astoo 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 viewedas individuals, while not necessarily overlooking the issue of the contagioneffects of any regional business risks.As has been observed, there has been generally improved market performancein stock markets on the African continent in terms of historical average annualreturns represented by market capitalisation, market liquidity and number ofdomestic listed companies over the period 1997 to 2007. However, this couldbe due to many factors.For countries to be attractive to external investors it is necessary to haveinvestor-friendly policies that protect their investments while creating anenvironment that allows competition. In so doing, it is important to evaluate themacro-economic and micro-economic policies that the respective countries onthe continent have. The sovereign credit ratings of countries are based oneconomic fundamentals whose rating affects the ratings of many companies orbusinesses in that particular country.The purpose of this study was to gain insight into whether a relationship existsbetween sovereign credit ratings and the performance of stock markets on theAfrican continent with respect to market capitalisation, market liquidity and thenumber of domestic listed companies. As it would appear that the information inthis study has not been documented previously for the African continent it maybe regarded as a formative evaluation and addition to the body of knowledge ofthe relationship between sovereign credit ratings and stock market performancein Africa. The statistical analysis methodology was undertaken usingSpearman’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 thisresult, a conclusion could be made. The findings of the research are intended toiiihelp countries in Africa evaluate their policies so that they become moreattractive to investors.A window period of five (5) years, (1999 to 2003), was used to analyse the dataset for sovereign credit ratings. A similar, four (4)-year window period (2000 to2003) was used for the comparison of the stock market indicators (marketcapitalisation, market liquidity and number of domestic listed companies). It wasnot possible to align the two window periods selected for the research as all thedata sets published lack information for certain years. However, it was felt thatas a trend – rather than an absolute correlation – was being sought, the validityof the research would not be unduly jeopardised.The result of the findings in this research was that there exists no relationshipbetween sovereign credit ratings and the performance of the stock markets onthe African continent with respect to market capitalisation, market liquidity andnumber of domestic listed companies. It became clear that the performance ofAfrican stock markets was influenced by factors other than an improvement orworsening in the macro- and micro-economic fundamentals of a country.The question remains: “What influences the performance of the stock marketson the African continent?” This is an important area for further research.The World Bank, through its implementing partner, the United NationsDevelopment Programme, needs to review its current programme to promotestock markets on the African continent to see what areas require additionalfocus for this project to receive the attention needed. Alternatively, it could bethat it is still premature to do so, considering that in 2007 only 20 countries hadstock markets.
