If your mental image of Africa is a vast desert dotted with the occasional elephant or lion, it might be time to update that a bit. Africa is one of the world’s fastest-growing economies, and these days you can get exposure to the continent with exchange traded funds (ETFs).
Africa Isn’t What It Used to Be
Some investors have been wary of Africa’s high poverty rate, disease, violence and corruption. But the image of Africa as lawless, corrupt, unstable, inadequate and uneducated is becoming more and more incorrect. If you still buy into that thinking, it could cost you an opportunity.
Over the past 10 years in Africa, child mortality rates have declined, while primary school enrollments have increased. More people have gained access to clean water and fewer have died in violent conflicts. More than 315 million people began using mobile phones and every day, 21st-century technology is creating new opportunities and unlocking untapped potential.
Africa has “transformed itself into one of the fastest-growing regions in the world, where banks haven’t needed bailing out, no large companies have folded, with no accounting scandals and where the biggest problem businessmen have is getting capital to finance growth,” says author Miles Morland, whom many consider to be the father of fund investment in Africa.
Even the International Monetary Fund (IMF) is on board, stating that “one of the least-noticed aspects of the global downturn has been the resilience of the sub-Saharan Africa region.” Many others have taken notice, too:
- Ian Bremmer, author of “The End of the Free Market” and president of Eurasia Group, recently stated that Africa offers one of the best investment opportunities today.
- International brands are experiencing greater growth from Africa’s markets as Africa’s middle-class starts demanding quality goods. Case in point: this year, Wal-Mart (NYSE: WMT) said it was setting up shop there.
- Philippe de Pontet, a director at Eurasia Group, remarked that Africa, rich in natural resources, is a play on commodities and the continent is host to a growing telecommunications market.
- Larry Seruma, chief investment officer of Nile Capital Management, commented that African indexes aren’t very correlated with the S&P 500, growth in Africa is expected to be strong with attractive valuations, other emerging markets are investing in the continent, infrastructure spending is high, debt is low and the population demographics are increasingly favorable.
Risks of Investing in Africa
While many are singing Africa’s praises, that doesn’t mean there aren’t risks to investing in this corner of the world.
It’s still one of the poorest regions in the world, and some countries – such as Somalia – are grappling with corruption and even a lack of government. Corruption, poverty, famine and illiteracy are still big problems.
Africa’s energy dependence leaves it open to pain if prices fall back too much, though it benefits when prices are high.
Africa, Broken Down
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.
As a pro subscriber, you can take advantage of our tools and research Africa-related ETFs further. To watch for opportunities in this region, set up alerts. If you want to build an emerging market portfolio and include Africa, you can do that, too!