Why You Should Pay Attention To Africa Right Now

By Aaron Levitt | August 14, 2014 AAA
With vast natural resources and a huge, young population, the next big thing in the emerging world are Africa’s lion economies.

Everyone is on the lookout for the next China — the next big emerging market — before it really takes off. After all, early investors in Asia’s Dragon economy were handsomely rewarded as the nation grew at breakneck speed over the past few decades.

To find that next big emerging market nation, investors may not want to turn towards broad funds like the iShares MSCI Emerging Markets (EEM). Instead, they should tread a bit off the beaten path.

In this case, we’re talking about Sub-Saharan Africa. Featuring uncorrelated returns and the potential for huge gains, Africa could be the last investing frontier.

Huge Growth Potential 

Historically, Africa has been seen as a wild frontier for investors. However, today, the continent is brimming with investment potential. Violence and political strife has been replaced with strong economic growth in more than a few places. Africa features many attributes that put it on par with many other emerging market leaders like China and India.

First, Africa is blessed with abundant natural resources. It's a massive continent, equivalent to the land masses of Europe, the United States, India, China and Argentina combined. That means lots of arable land as well as huge, untapped mineral reserves. Africa's borders hold nearly 40% of earth's total gold reserves and 30% of its mineral deposits. Additionally, the continent features vast amounts of oil and natural gas, which are just now beginning to be exploited in places like Mozambique and Nigeria. All of this vast natural resource wealth has begun to finally trickle down to Africa's residents, as well.

Speaking of those people, Africa shares another thing in common with other emerging markets: a huge population. The continent is home to more than 1.1 billion people. That’s a big deal considering that the majority of that population is young; around 40% of the Africa's population is younger than 17. That workforce, which rivals Asia's in size, should be able to power Africa for decades to come and drive a new wave of consumerism.

Given the similarities to other emerging markets, it’s easy to see how Africa could lead to investment gains. Recent International Monetary Fund research found that seven out of the 10 fastest-growing economies were located in Africa. What’s more, sub-Saharan Africa is estimated to see GDP growth of around 5% this year. That’s substantially faster than the developing-country average.

Add in low debt levels and rising foreign direct investment, and the opportunity in Africa continues to look better for longer-term investors.

Betting on Africa’s Growth Potential

Given Africa’s potential, investors may want bet on the continent’s future growth. Some African firms, such as telecom MTN Group Ltd. (MTNOY) or energy firm Sasol Ltd. (SSL) do trade on American exchanges. However, the majority don't, and given the variety of African nations, opportunities and risks, a broad strategy could be best.

That means choosing an exchange traded fund, such as the $126 million Market Vectors Africa ETF (AFK). AFK tracks 113 different firms that are headquartered in or generate the majority of revenues in Africa. That includes exposure to nations like South Africa, Kenya, Tanzania and Nigeria. The ETF is dominated by financial and commodity names; the two sectors make up about 75% of its assets. That hasn’t hurt AFK on the returns front so far, as it’s managed to produce a nearly 7% annual return over the last five years. What has hurt is the ETF's high expense ratio of 0.81%. However, AFK does feature the broadest collection of African holdings versus other rival funds, such as the SPDR S&P Emerging Middle East & Africa (GAF).

For investors really looking to potentially up their returns, there are several individual African nations represented by ETFs. The largest of which is the $590 million iShares MSCI South Africa (EZA). EZA allows investors to bet on Africa’s current shining star by tracking 51 different South African firms. The beauty of buying the fund is that the majority of these stocks are leaders across all of Africa. That includes giants like media firm Naspers Ltd. (NPSNY) and gold miner AngloGold Ashanti Ltd. (AU), making EZA almost as broad of a play as AFK.

More adventuresome investors can use the Market Vectors Egypt Index ETF (EGPT) and Global X Nigeria Index ETF (NGE) to bet on Africa’s “next big things.” Both nations feature vast oil wealth, and think-tank McKinsey & Co. projects that Nigeria’s economy could expand by 7.1% per year through 2030. Both funds are volatile, but could be huge winners long term.

And while the current investment avenues in Africa are narrow, there are plenty of new funds and ETFs on the docket from a variety of issuers covering a variety of African themes. Soon investors will be able to focus their African exposure even more.

The Bottom Line

For investors, the next big thing in the emerging world could be Africa’s lion economies. Featuring several of the same attributes as other developing-nation superstars, Africa has potential to be a big winner longer term. Investors with longer timelines should consider adding exposure to the continent to their portfolios. 

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