Investing In Africa With ETFs (EZA, AFK, EGPT)
In the half century since the colonial powers packed up and went home, Africa hasn’t done too well. Governments came and went with varying degrees of nationalism, socialism and capitalism. But they never really produced anything to brag about, and overall, nothing changed. Finally though, the continent’s forecast seems to be looking up. Africa’s natural resources are garnering more and more attention, and business improvements are trending upwards… Which makes now an interesting time to get involved.
Africa – The New Investment Destination
A steady flow of multi-billion dollar investments, strong trade flows and growing interest in regional financial markets point to African strength going forward.
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The continent already rebounded nicely from last year’s slump. While the western world lags behind, the IMF forecasts 2010 GDP growth in sub-Saharan Africa to rise to almost 6%.
The region could even be close to joining the BRIC nations (Brazil, Russia, India and China) as an investment destination.
In part, its economic rise stems from improved economic management and recent debt write-offs. But most of it comes from its own natural resources, which the world is craving more and more these days.
- Africa has at least 10% of global oil reserves.
- Nigeria and Algeria claim the seventh and eight biggest natural gas reserves.
- While South Africa has 40% of the world’s gold.
The continent has over a third of the world’s cobalt reserves, a plethora of base metals like copper and iron ore, the second largest rare earth metals reserves, and practically untouched agricultural potential.
And that vast natural resource potential is still virtually untapped.
In the past decade, Asian demand for African commodities has helped reverse the price slump that contributed to so many of the continent’s problems. China especially, has led the way, increasing its trade with Africa ten-fold between 2000 and 2008.
China and India Investing in Africa
At last November’s China-Africa summit, Beijing pledged $10 billion in infrastructure spending. And India jumped in with its own pledge of $5.4 billion for energy, telecom and infrastructure.
The continent can thank both nations for their interest, but it can also take some of the credit for itself. For instance, Africa can claim the world’s fastest-growing mobile telephone market over the past decade.
Between 2002 and 2007, that market grew by 49.3%, outpacing even Asia’s 27.4%. That may indicate the emergence of 900 million new consumers once too poor to really be bankable.
Many of the companies reaping the benefits of this virtually untapped consumer market are African. New research by the Boston Consulting Group shows Africa’s top businesses emerging strong on the global stage.
The study shows 500 of those companies growing more than 8% annually since 1998. It also details how export growth has helped power the expansion.
Exports surged from 3% annually during the 1990s to 18% in the 2000s. The report went on to compare that growth to China, India and Russia, pointing out that it even tops Brazil.
The top 40 companies in the report come from eight countries, which represent 70% of Africa’s GDP together. Most of them are based in South Africa, Egypt and Morocco, with the remainder in Algeria, Angola, Nigeria, Togo and Tunisia.
A $1,000 investment into those top 40 over the past decade would have grown to over $9,000 by November 2009!
Investing in the “African Lions”
The study also highlights a group of fast-growing nations that it calls “African Lions:” Algeria, Botswana, Egypt, Libya, Mauritius, Morocco, South Africa and Tunisia. Like the “Asian Tigers,” these countries should enjoy strong economic growth going forward.
Already, their collective per capita GDP of $10,000 beats out the BRIC’s average.
Patrick Dupoux, one of the report’s authors, says the research should wake up western companies. Because both Africa’s market of about 1 billion people and its businesses are looking better and better.
With the exception of many South African companies, most African businesses don’t trade in the U.S. So ETFs probably afford the best way to profit from the continent.
Investors can target individual countries through iShares MSCI South Africa Index Fund (NYSE:EZA) and Market Vectors Egypt Index (NYSE:EGPT).
Or Van Eck offers the more diverse Market Vectors Africa Index ETF (NYSE:AFK). This fund has a broad allocation in its portfolio among the top countries: South Africa – 29%, Egypt – 19%, Nigeria – 21.5%, Morocco – 12.5%.
Demand for African commodities, land and manpower isn’t likely to fade away. As outside interest picks up, the economy will continue forward towards becoming the world’s next, exciting frontier market.
Good investing,
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