Africa – Eyeing a Huge Opportunityon Monday, 19 November 2012. Posted in Emerging Markets, Market Flash
This article was originally posted on Caterer Goodman’s online blog China Expat Money.
20 years ago, Africa was a land of border wars, revolutionaries and dictatorships. While this still exists today, it is slowly developing more democracy and moving away from the careless behavior of the past. Back then, corporations were moving into Africa just to extract the natural resources and then ship it back home. Nowadays, they stick around, build infrastructure and contribute more to the local economies.
Evidently, they see a future in the region and they are betting huge on it. China specifically is one of the biggest investors in Africa, as they focus on acquiring commodities for the long-term. Most investors are a bit timid to invest here and they have good reasons. Despite all the doubts there are many excellent reasons to invest in this continent. First I will touch on some of the ongoing issues that add risk to an African investment.
- Liquidity: Certain countries such as South Africa and Nigeria have a couple solid ETF’s but if you are looking beyond a regional fund and specifically at a particular country, then you may have a problem getting access.
- Corruption:A widely known and nagging problem that has plagued African nations for decades.
- Underdeveloped infrastructure:The lack of extensive communication networks, roads and basic necessities in the cities are slowing down the rate of growth and development.
- Local Bureaucracy: Often slow and inefficient local governments make life challenging for entrepreneurs and other businesses.
Despite the problems I just listed, there are many reasons to invest that outweigh the negatives. Also, remember that some of these problems are being resolved and once they are; there is tremendous upside to an investment. So the ones that are savvy enough to invest before the masses will do the best.
- Growing African GDP growth:Nigeria, Zambia and South Africa are showing remarkable rates of growth and reductions in inflation. Also, Kenya has emerged as one of the fastest growing economies.
- Infrastructure:It turns out the problem can actually turn into a benefit. Over the past 5 years, many new power plants, roads and communication projects have been completed, with the support of New Partnership for Africa’s Development (NEPAD).
- Ecommerce:Mobile phone use, internet and financial transactions online have increased many folds adding more tax dollars to the state coffers.
- Strong market returns: Since 2009 the South African Market (JALSH) has nearly doubled with a 66% return which matched the strongly performing S&P 500. The Nigerian market is a bright spot as well.
- Low correlation: a well built portfolio will have positions that are uncorrelated to each other. From 2002 to 2009 a composite of an African index had a correlation of 0.59 which means that 59% of the time the African returns were different than the S&P 500.
- Commodities: There has been a rapid increase in FDI and investment in large projects in Africa. China is particular has invested a lot in oil and other commodities here. With 40% of the worlds proven gold reserves in Africa and 10% of oil reserves, it’s a safe bet that more capital will pour in from abroad.
- Less violence: It is becoming less like the Wild West and more like developed countries with a civilized population.
- Low debt levels: Amazingly, a lot of African countries are able to manage their debt very well which puts them in a great position. Euro countries may want to take a few tips from Nigeria on this one.
- Young Demographics: Lastly, in contrast to China’s growing working population, Africa isn’t burdened by pension plans or an elderly population. Nigeria’s median population is 19 compared to China’s at 35 (and rapidly increasing) and 37 in the USA.
When investing in an emerging market the question is always how? Thankfully, we live in the time that we do and there are some solid and specifically cheap ETF’s such as EZA (South Africa) and AFK. It may be too risky investing in individual stocks is why we recommend ETF’s.
In this article the positives and negatives were just briefly touched upon but should give you a good idea whether you are ready to make the next step. I like it because the western markets are often oversaturated and more difficulit to achieve higher returns. Personally, I prefer good returns with less work involved.
This is a riskier investment that would fit outside someone’s core holdings that is seeking to boost their annual return. Hopefully, I have stoked your curiosity so contact us to learn more.