Are You Interested In Investing In Africa? That Is How
A trip to Africa since it was labeled “Hopeless Continent” on the cover. The Economist from May 2000 to December 2011, when the same publication put “Africa Rising” on its cover (and then “Aspiring Africa” in March 2013) was just plain boring. Africa is now the newest destination for emerging market investors. As of 2000, according to the World Economic Forum, “Africa was home to half of the world’s fastest-growing economies.” Ghana and Ethiopia showed real GDP growth of over 8% in 2018.
key takeaways
In the last 21 years, Africa has gone from being seen as a “hopeless continent” in terms of its financial potential, to an exciting prospect for emerging market investors.
The continent has abundant natural resources, an increasingly skilled young workforce, greater stability in terms of governance, and greater prospects for economic growth than in previous years.
For new investors looking to make a small investment, mutual funds or exchange-traded funds make sense.
More experienced investors may consider American Deposit Returns (ADRs) as a way to participate.
The African continent is extremely rich in natural resources. The huge unused reserves of natural gas and oil (10% of world reserves) and hydroelectric power are largely untapped. It contains vast reserves of gold, platinum, uranium, iron ore, copper, and diamonds. Currently, only 10% of Africa’s arable land is cultivated, but about 60% of the world’s arable land is cultivated. So Africa is now a magnet for foreign direct investment (FDI).
Africa also has the advantage of having a large and relatively cheap educational workforce. The continent is undergoing a demographic transformation, with youth as the theme; There is a very high proportion of Africans in their 20s and 30s with fewer dependents, young and old, who will be playing in the next decade.
There is stability in terms of governance; countries that have witnessed terrible periods of unrest have become success stories. There are better policies, trade has improved and so has the business environment.
According to the World Economic Forum, by 2030, more than 40% of Africans will belong to the middle or upper classes, and there will be greater demand for goods and services. In 2030, household consumption is expected to reach $2.5 trillion, more than double the 2015 consumption of $1.1 trillion.
Much of that $2.5 trillion will be spent in three countries: Nigeria (20%), Egypt (17%), and South Africa (11%). But Algeria, Angola, Ethiopia, Ghana, Kenya, Morocco, Sudan, and Tunisia will attract companies looking to enter new markets. The sectors expected to grow the most in the next 30 years are food and beverages, education and transportation, housing, consumer goods, hospitality and recreation, health care, financial services, and telecommunications.
Stocks represent the economy
Sub-Saharan Africa has about 29 stock exchanges representing 38 countries, including two regional exchanges. There is a lot of difference in these exchanges in terms of size and trading volume. There are a handful of major exchanges on the continent and many newer, smaller exchanges characterized by small trading volumes and few listed stocks. All countries are making efforts to strengthen their exchanges by improving investor education and confidence, improving access to funds, and making procedures more transparent and standardized. The table below shows the dollar-adjusted returns (as of 2018) for selected stock exchanges in Sub-Saharan Africa ( listed in alphabetical order ).
African stock markets have different tastes and require in-depth knowledge to select the right stock exchange. It’s a better bet for small investors looking to invest in a taste of sub-Saharan Africa through mutual funds or exchange-traded funds (ETFs).
Direct access
The way to get direct access to African stocks is to open a local brokerage account. This can be a bit tricky because investors have to shortlist stocks as well as stocks. Some brokerage firms serving foreign investors interested in a country include:
The Johannesburg Stock Exchange (JSE) is the largest in Africa by market capitalization.
ETFs and mutual funds
Investing through ETFs and mutual funds (which are traded on US exchanges) has a built-in advantage, diversification, and professional management. Some of the most notable are:
Market vectors Africa ETF Index (AFK), which tracks some of Africa’s largest and most liquid stocks. It has around 114 shares and has a country allocation in Egypt (21.4%), South Africa (20.7%), Nigeria (15%), the UK (12.6%), and Morocco (6.6%).
The ET&S Middle East & Africa ETF (GAF) is 78.39% allocated to South Africa, followed by the United Arab Emirates (8.23%), Qatar (7.72%), Egypt (3.97%), and Morocco (1.61%).
The MSCI iShares South Africa Index (EZA) is allocated 99.5% to medium and large South African companies in the financial services, consumer discretionary, and telecommunications sectors.
The Egypt Vector ETF Market Index (EGPT) gives access to Egypt, the third largest economy in Africa, with an allocation of around 85%. The rest is distributed to diversify geographically in Luxembourg, Canada, and Ireland.
The Global X Nigeria ETF (NGE) index focuses on Nigeria and financials, consumer staples, energy, materials, and industrials are the main sectors.
The Cloud Atlas Big50 ex-SA ETF (AMIB50: SJ) is an ETF domiciled in South Africa. The ETF invests in 50 representative companies across the African continent, excluding South Africa, through 15 African stock exchanges.
Mutual funds that invest in Africa include the Alquity Africa Fund ( ALQAFBG: LX ), Investec Pan Africa ( INVPNAS: GU ), Neptune II – African Neptune Fund Investment Funds ( NEPAFRB: LN ), JPM African Equities ( JPMAACU: LX ), Commonwealth Fund for Africa ( CAFRX ), and Pan African Nile Fund A ( NAFAX ).
For market participants who do not invest in African companies, mutual funds and ETFs are the safest bet, followed by US certificates of deposit from select companies.
ADR
American Deposit Returns (ADRs) are a good way for US investors to pick select African stocks that are traded on US exchanges. Many of these are natural resource games, such as AngloGold Ashanti (AU), DRD Gold ( DRD), Gold Fields (GFI), Harmony Gold (HMY), Randgold (GOLD), Sibanye Gold, and Sasol (SSL). All the companies mentioned above are engaged in mining, except Sasol, which is engaged in the oil and gas business. Additionally, MiX Telematics (MIXT) is in the logistics technology business. There is a broader universe of African equities that are traded on the pink market or over-the-counter (OTC) market. Pink sheets are also unregulated and are marketed in slim sizes.
The baseline
Africa still has a long way to go. Political and social unrest, lack of infrastructure, and poverty are common problems. But the bigger picture shows the progress of the continent; there is more and more political stability, economic growth, and progress in their banking systems, with greater accountability and transparency. Demand is growing from its growing middle class, and local businesses are filling that need by expanding. No one can accurately predict the trajectory of growth, but sub-Saharan Africa is poised to grow.
Disclosure: The author did not mention any of the stocks/funds at the time of writing this article.
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