Africa’s was dismissed not so long ago as “The Hopeless Continent” in terms of economic growth prospects and investment opportunities.
Today, Africa has largely dismissed that title, becoming one of the newest destinations for emerging markets investors. Since 2000, the World Economic Forum has identified more than half of the world's fastest-growing economies as located in Africa. Here we look at the past 20 years of Africa's economic development and future prospects.
- Over the last 20 years, Africa has gone from being seen as a "hopeless continent" in terms of its financial potential, to an interesting prospect for emerging market investors.
- The continent has extensive natural resources, a young and increasingly educated workforce, more stability in terms of governance, and more prospects for economic growth than in years past.
- For new investors looking to make a small investment, mutual funds or exchange-traded funds make the most sense.
- More experienced investors may also consider American depositary receipts (ADRs) as a way to participate.
- Still, the continent is a riskier prospect for investors than more developed regions, and should be approached with caution and due diligence.
Africa's Vast Natural Resources
The African continent is incredibly rich in natural resources. It has huge, untapped reserves of natural gas and oil (10% of the world’s reserves) and largely unexploited hydroelectric power. It is home to vast gold, platinum, uranium, iron ore, copper, and diamond reserves. Currently, only 10% of Africa’s arable land is being cultivated, yet it holds around 60% of the world’s cultivable land. As such, Africa has become a magnet for foreign direct investment (FDI).
Africa also has the advantage of a large and relatively cheap educated labor force. The continent is undergoing a demographic transformation, with youth as its theme; there is a very high proportion of Africans in their 20s and 30s with fewer dependents – both old and young – that will play out over the next decade.
There is stability in terms of governance; the countries that witnessed terrible periods of unrest have emerged as success stories. There are better policies in place, trade has improved and so has the business environment.
According to the World Economic Forum, by 2030, over 40% of Africans will belong to the middle or upper classes, and there will be a higher demand for goods and services. In 2030, household consumption is expected to reach $2.5 trillion, more than double that of 2015 at $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 seeking 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, healthcare, financial services, and telecommunications.
Stocks Mirror the Economy
Sub-Saharan Africa has around 29 stock exchanges representing 38 countries including two regional exchanges. These exchanges have a lot of disparity in terms of their size and trading volume. The continent has a handful of prominent exchanges and many new and small exchanges that are characterized by small trading volumes and few listed stocks. Efforts are being put in place by all countries to boost their exchanges by improving investor education and confidence, improving access to funds, and making the procedures more transparent and standardized.
The table below depicts the dollar-adjusted returns (as of December 2021) of select stock exchanges in Sub-Saharan Africa (listed alphabetically).
|Botswana Stock Exchange||-1.2%||-13.6%||-24.9%||-28.7%||-31.0%||-18.5%|
|Dar es Salaam Stock Exchange||-2.2%||-4.0%||-18.5%||-21.5%||9.0%||-15.8%|
|Ghana Stock Exchange||-6.0%||8.9%||10.3%||-38.8%||N/A||3.5%|
|Johannesburg Stock Exchange||-10.0%||-19.4%||-15.3%||-26.4%||58.3%||-31.0%|
|Lusaka Stock Exchange||-0.5%||-13.7%||-3.8%||-51.3%||-37.3%||-16.1%|
|Malawi Stock Exchange||-3.0%||33.1%||31.8%||18.3%||N/A||28.0%|
|Nairobi Securities Exchange||-4.5%||-9.2%||5.2%||-9.1%||73.1%||-14.5%|
|Namibian Stock Exchange||-2.4%||1.1%||20.5%||30.2%||171.8%||-12.6%|
|Nigerian Stock Exchange||-1.1%||-12.2%||-39.0%||-62.2%||-71.7%||-15.8%|
|Rwanda Stock Exchange||-2.5%||-4.6%||-36.4%||N/A||N/A||-6.5%|
|Stock Exchange of Mauritius||0.3%||1.9%||23.7%||-1.9%||61.3%||0.1%|
|Uganda Securities Exchange||-3.4%||1.7%||-8.9%||-26.7%||32.9%||-13.4%|
|Zimbabwe Stock Exchange||28.9%||-0.6%||291.4%||144.2%||N/A||58.1%|
How To Invest
African stock markets come in different varieties, and they require deep understanding to select the appropriate stock exchange. Due diligence is key. Investing through a mutual fund or exchange-traded fund (ETF) is often a better bet for small investors looking to taste a bit of Sub-Saharan Africa.
The only way to directly access African stocks is to open a local brokerage account in an African country. This can be a bit complicated, as investors need to shortlist stocks, as well as stock exchanges. Some of the brokerage firms that cater to foreign investors interested in a single country include:
- Tanzania: Orbit Securities, Vertex Securities;
- Kenya: Faida Investment Bank;
- Ghana: CAL Brokers, FirstBanc Brokerage Services and Stanbic Bank Ghana Brokerage
- Nigeria: Zenith Securities, Meristem and Cowry Securities;
- Zimbabwe: EFE Securities and Lynton Edwards;
- South Africa: Nedbank Online Trading and Sanlam iTrade.
Some noteworthy companies operating across different regional exchanges include KenolKobil Ltd., Dangote Cement PLC, CRDB Bank, National Microfinance Bank (NMB), African Alliance, Bank of Kigali, Bralirwa Ltd., Equity Bank, KCB Bank, ARM Cement, Ecobank, UBA Plc, CIC Insurance, Britam, Courteville Business Solutions PLC and Naspers Ltd.
The Johannesburg Stock Exchange (JSE) is the largest stock exchange in Africa by market capitalization.
ETFs and Mutual Funds
Investing via ETFs and mutual funds comes with the built-in advantage of ease (they are traded on U.S. exchanges), diversification, and professional management. Some prominent ones include:
- VanEck Africa Index ETF (AFK), which tracks some of the largest and most liquid stocks in Africa. It holds about 75 stocks and has a country allocation (top 3) to South Africa (26.5%), Morocco (15.6%). and Nigeria (13.9%).
- The iShares MSCI South Africa Index (EZA) is allocated 99.5% to mid-sized and large companies in South Africa in the financial, consumer discretionary, and telecommunication services sectors.
- The Market Vectors Egypt Index ETF (EGPT) gives access to Egypt, the third-largest economy in Africa, with an allocation of around 85%. The remainder is spread to geographically diversify across Luxembourg, Canada, and Ireland.
- The Global X Nigeria Index ETF (NGE) concentrates on Nigeria with financials, consumer staples, energy, materials, and industrials as the top sectors.
- The Cloud Atlas Big50 ex-SA ETF (AMIB50:SJ) is an ETF domiciled in South Africa. The exchange-traded fund 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 Investment funds II – Neptune Africa Fund (NEPAFRB:LN), JPM Africa Equity (JPMAACU:LX), Commonwealth Africa Fund (CAFRX) and Nile Pan-Africa Fund A (NAFAX).
For market participants new to investing in African companies, mutual funds and ETFs are the safest bet, followed by the American Depositary Receipts of select companies.
American depositary receipts (ADRs) are a good way for investors in the United States to pick select African stocks trading on U.S. exchanges. Many of these are natural resources plays, such as AngloGold Ashanti (AU), DRD Gold (DRD), Gold Fields (GFI), Harmony Gold (HMY), Randgold (RNDFX), Sibanye Gold, and Sasol (SBSW).
All of the previously mentioned companies are in mining, with the exception of Sasol, which is in the oil and gas business. In addition, MiX Telematics (MIXT) is in the logistics technology business. There is a wider universe of African stocks that trade on the Pink Sheets or over-the-counter (OTC) market. Pink sheets are less regulated and are traded in thin volumes.
Who Is Investing in Africa?
Investors looking to diversify their portfolio to include emerging markets look to African investments. In terms of foreign direct investment (FDI), China has been the leading investor in Africa over the past decade, followed by the United States and France.
How Do I Invest in Africa’s Emerging Markets?
The easiest way for individual investors to gain access to African shares is via regional ETFs or mutual funds that specialize in Africa. You can also look to ADRs of Africa-based corporations.
Which Nations’ Economies Are Rapidly Expanding in Africa?
The economies of Israel, Morocco, Kenya, Ghana, Egypt, and South Africa have grown at the fastest pace in 2021 for the region of Africa-Middle East, each growing over 4%.
Is China Investing in Africa?
China has been the largest investor in Africa over the past decade. According to estimates, Chinese direct investment across Africa grew nearly 90x, from $490 million in 2003 to $43.4 billion in 2020.
The Bottom Line
Africa still has a lot to combat. Political and social unrest, lack of infrastructure, and poverty are common problems. But the bigger picture portrays the continent's progress; increasingly, there is political stability, economic growth, and advances in its banking systems, with better accounting and transparency. There is increasing demand from its growing middle class, and local companies are filling that need expanding. Nobody can predict the growth trajectory with accuracy, but Sub-Saharan Africa is poised for growth.
Disclosure: The author did not hold any of the mentioned stocks/funds at the time this was written.