Cost of equity

Risk versus reward is a key determinant of investment activity. Cost of equity is representative of the investor’s evaluation of the risk that the enterprise is exposed to. We estimate that the GDP weighted cost of equity for the continent is 21% and has decreased in the current year by 0.35%.

Reduction in perceived risk on the continent

Change in cost of equity in 2017 by region

Most regions showed a decrease with Egypt & Sudan; Nigeria and Other West Africa being the only regions to record increases. Sudan’s current political instability and hyper-inflation drives the increase in that region, while Nigeria’s relatively small increase represents the final negative impact of the commodity cycle and the resulting currency devaluation.

Reduction in perceived risk on the continent

Change in cost of equity in 2017 by country

The remainder of the continent showed reductions in cost of equity reflecting the lowering of investment risk and supporting the increase in asset prices over the period. East Africa has shown a 1% decrease in cost of equity. Kenya, the largest economy in the region’s risk profile, has remained steady over the year, with Tanzania, Rwanda and Ethiopia all recording decreases in risk. This is the second year in which this region has recorded a decrease in cost of equity, lending some support to the increased asset prices in the region.