Africa is rapidly 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 Africa's economic development since 2000 and its future prospects.
- Since 2000, many countries in Africa have turned their economies into attractive prospects 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 (12% of the world’s reserves) and largely unexploited hydroelectric power. It is home to vast gold, platinum, uranium, cobalt, and diamond reserves. More than 60% of the world's arable land is in Africa, but according to a 2019 report by McKinsey, the continent's agriculture is only living up to a fraction of its potential.
Africa also has the advantage of a large and relatively cheap 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, and many 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.
Economic Growth in Africa
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. By that time, 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 by 2030 are food and beverages, education and transportation, housing, consumer goods, hospitality and recreation, healthcare, financial services, and telecommunications.
Nigeria is the largest African economy, with a GDP of $514 billion USD in 2021. The next largest was Egypt, with $394 billion.
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.
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 for exposure to the economies of Sub-Saharan Africa. Such funds track a large basket of companies doing business in the region, rather than relying on any single stock or venture.
It is possible to invest in African stocks directly, although this route may come with additional risks. Some foreign stocks trade in North American exchanges as depositary receipts, securities that represent stocks in a foreign company. Domestic brokerages, such as Fidelity, also offer trading in international stocks, although doing so does involve some additional paperwork.
There are downsides to trading international stocks. According to the U.S. Securities and Exchange Commission, domestic traders may face additional risks on the foreign stock market. Foreign companies may be subject to less stringent regulations or reporting requirements than those at home, and U.S. investors may incur unexpected taxes. In addition, foreign securities are often priced in a foreign currency, adding an additional layer of risk for the U.S. trader.
The Johannesburg Stock Exchange (JSE) is the largest stock exchange in Africa by market capitalization.
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
The VanEck Africa Index ETF (AFK) tracks some of the largest and most liquid stocks in Africa. It holds about 75 stocks and has a country allocation (top three) to South Africa (25.18%), Morocco (13.5%), and Nigeria (11.8%). Over the five years before 2022, the fund has closed each year with an average 1.18% loss in net asset value (NAV).
The iShares South Africa Index Fund
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. Over the five years ending in May of 2022, the fund gained annualized returns averaging 1.14% each month.
Market Vectors Egypt Index Fund
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. Over the five years ending in May of 2022, the fund posted an annualized average loss of 3.73% of its net assets.
Mutual funds invest in a large basket of different securities, usually targetting specific economic sectors or regions of the world. There are many such funds invested in the developing world as a whole, as well as those that invest only in Africa, or only in specific countries. The following are some notable examples:
T. Rowe Price Africa and Middle East Fund
Abbreviated as TRAMX, this fund is focused on banks and companies in Africa and the Middle East, as well as a handful of European companies that do business there. Nearly 25% of their portfolio is located in South Africa. Over the five years ending in March 2022, the fund experienced average quarterly growth of 10.41% on an annualized basis.
Commonwealth Africa Fund
Launched in 2011, the Africa Fund(CAFRX) is one of five mutual funds under the umbrella of the Commonwealth International Series Trust. It largely invests in equity and debt securities issued by African companies involved in manufacturing and mining. Over the five years before March of 2022, CAFRX experienced average quarterly returns of 4.22%.
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 trade select African stocks. These securities represent shares in a foreign-registered company, allowing U.S. investors to trade African stocks in a U.S.-based stock market.
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 corporations that do business in Africa.
Is African Real Estate a Good Investment?
While real estate has largely been overlooked by investors in Africa, there are indications that some markets may have potential for rapid growth. Demographic trends and rapid population growth suggest future increases in demand, especially in those cities most geared towards technological and industrial development. According to IPE Real Estate Magazine, the Kenyan real estate sector returned between 25-30% gains over the five years before 2018–a phenomenal figure, even considering the additional risks and costs to investing in the continent.
How Do You Invest in Real Estate in Africa?
The simplest way to invest in real estate in Africa, or any other place, is through a Real Estate Investment Trust, or REIT. These pooled funds operate like mutual funds for the real estate market: they accumulate a portfolio of income-generating rental properties, and deliver any net proceeds to their investors.
Why Is China Investing in Africa?
China is making significant investments into African and other developing economies as part of the One Belt and One Road initiative, a multi-trillion dollar plan to enhance trade and industrial connectivity throughout Africa and Asia. As part of this program, China is making sizeable investments in African ports, railways, and industrial facilities, that can later be integrated into a global trade network.
The Bottom Line
Although Africa has yet to recover from centuries of foreign domination, many African countries are becoming economic powerhouses in their own right. There is increasing demand from the growing middle classes, and local companies are filling that need expanding. Nobody can predict the growth trajectory with accuracy, but several countries on the African continent appear to be poised for growth.
Disclosure: The author did not hold any of the mentioned stocks or funds at the time this was written.