Africa is a massive continent. It’s three times the size of the United States. Since it’s so large, its economies are moving at different rates of growth. For that reason, it’s wise to consider each economy on its own fundamentals in addition to its role as part of the whole.
On the whole, Africa’s economy is dominated by its mining industry, but the lack of infrastructure has kept costs of transporting goods relatively high. This may be an opportunity for the beginnings of a mass development in the continent’s inadequate infrastructure.
The largest economy on the continent is South Africa. South Africa has both emerging and developed market characteristics. The government encourages foreign investments and has also committed spending to maintain and upgrade the country’s infrastructure. Manufacturing is a major component of the economy and the mining sector will likely be the top performer since South Africa enjoys a large reserve of natural resources. Additionally, South Africa’s financial sector was not crippled like many developed economies, and access to finance is improving corporate and retail markets.
Another notable country is Egypt. Egypt is the most populous country in the Arab world and 16th largest in the world, with around 80 million people. The country’s per capita GDP is below the global average, but its financial system is one of the most developed in the emerging markets. Unlike other countries in the region, oil and gas only accounts for around 15% of the country’s GDP, so it’s not as dependent on what energy prices are doing. In fact, Egypt has a number of other major sectors that account for a larger portion of GDP, such as tourism, agriculture and industrials.
Africa and ETFs
The ETF industry hasn’t missed Africa’s transformation. A number of new products giving exposure to the continent have launched in recent years. Since Africa is still mostly a frontier market, these ETFs are a perfect opportunity for clients who are both mindful and accepting of the risks that accompany them.
There are a couple of broad funds to choose from: Market Vectors Africa (NYSEArca: AFK) has its heaviest weight in South Africa, at 29%, though Morocco, Egypt, Nigeria and others are represented; SPDR S&P Emerging Middle East & Africa (NYSEArca: GAF) is more or less a South Africa play, which gets 64.3% of the weighting. Morocco and Egypt are also represented.
For single-country exposure, consider ETFs like Market Vectors Egypt (NYSEArca: EGPT) or iShares MSCI South Africa (NYSEArca: EZA).
Watch out in the coming year, as well; a number of ETF providers have Africa ETFs in registration, including WisdomTree, Global X and State Street.
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