When it comes to investing in markets outside of the U.S., Africa is often overlooked. But investing interest in the continent is starting to grow, particularly with investors who have a long-term focus.
In April, The Wall Street Journal reported that the New York State Common Retirement Fund, a U.S. pension fund, planned to invest as much as 3 percent of its assets in the region. And in November, private-equity firm The Carlyle Group bought an 18 percent stake in the Nigerian-based Diamond Bank. Multinational firms are also entering the region.
Like a lot of emerging and frontier markets, Africa’s positives are a young demographic, a growing consumer class and vast opportunities to build infrastructure, including roads, seaports and airports. Inflation is also low, and a few recent elections have occurred without incident, such as when Muhammadu Buhari won the Nigerian presidential election over incumbent Goodluck Jonathan. Buhari was the first opposition candidate to win a Nigerian presidential election, and the peaceful handover was seen as a big step for democracy there.
Africa offers promise of long-term growth, but investors need to remember that just as with other emerging and frontier markets, it’s a risky place to put money. Growth can falter, and corruption is still an issue for many African countries.
It’s a continent, not a country. Africa is not one big economy, but is made up of many markets.
“Depending on who is counting, there are 48 to 53 different economies in Africa and about 40 separate equity markets. So there’s a wealth to choose from when you’re trying to take advantage of the positive investment thesis,” says Joel Wells, portfolio manager at Boston-based Alpine Funds.
Those positives are the higher growth outlook and a young demographic, but, Wells says, “on the other side of the coin, there is still corruption, there are worries about governance, diseases like Ebola [and terrorist groups such as] Boko Haram.”
Like most emerging markets, especially those that rely on commodity exports, Africa has suffered from the problems of slowing Chinese growth, says Ryan Hoover, founder of Investing in Africa, which focuses on African stock markets.
Many observers see Africa as a commodities play since countries like Nigeria and Angola are petroleum exporters, and South Africa exports precious metals such as gold and platinum. And countries like South Africa are struggling because of the commodities bust, along with currency depreciation, making imports more expensive.
But Hoffman says Africa is more than just commodities.
“It is a commodity play, but there’s also a lot more development going on for the internal consumer base. Kenya is a good example of that. You’ve seen growth in the service sector, such as telecom companies and technological entrepreneurs,” he says.
What about interest rates? There are some concerns about the impact on Africa – and emerging markets in general – when the Federal Reserve eventually raises rates. Some caution that the historically low global interest-rate environment and the commodities boom of the past decade have papered over the Africa’s long-time problems. They say the commodities bust and the likelihood of rising U.S. interest rates will reveal that not much in Africa has changed.
However, Robert R. Johnson, president and chief executive officer of the Pennsylvania-based American College of Financial Services and author of the book “Invest with the Fed,” says when the Fed was raising rates from 1996 through 2013, the African frontier markets returned nearly 25 percent.
“It appears that investors may want to consider emerging markets, particularly the African frontier, when the Fed finally moves to raise rates. Many investors are hesitant to go into emerging markets when rates are rising, but my research shows that is just the time that emerging markets have done well over the past few years,” he says.
William Hoyt, managing director at Lattice Strategies, a San Francisco firm that has exposure to South Africa in its Emerging Markets Strategy exchange-traded fund (ticker: ROAM), says generally, people who invest in emerging markets should understand the market’s liquidity, meaning how easy is it for an investor to put in or take out money.
Hoyt says South Africa has mature and well-developed capital markets, which makes them less risky from an operational standpoint. One of the next biggest African capital markets, Nigeria, is a fraction of the size of South Africa.
“In our assessment, South Africa, while still an emerging market from an economic perspective and certainly a geopolitical perspective, but it has a quite deep and wide market that’s suitable for emerging market investors. But Nigeria … is roughly a tenth of the size of South Africa, so we are less ready to embrace [that] country,” he says.
How to invest in Africa. Hoffman says because African markets can be very volatile, he cautions investors to devote a small percentage of their portfolio to Africa – maybe about 5 percent. The easiest way is with ETFs, he says. The most common ETF is the Market Vectors Africa ETF (AFK).
“It’s a great way to get low-cost exposure to Africa,” Hoffman says.
There are also a few country-focused ETFs, such as one from iShares MSCI South Africa (EZA) as well as Global X MSCI Nigeria (NGE), a newer ETF, he says. One mutual fund, the Nile Pan-Africa (NAFAX), focuses three-quarters of the portfolio on sub-Saharan companies outside the mining and energy sectors.
For investors considering individual stocks, U.S. investors need to buy American Depository Receipts. ADRs are stocks that trade in the U.S. but represent a specified number of shares in a foreign company. Hoffman’s top picks, which he says he owns, include MTN Group (MTNOY), a cellular provider for much of the continent.
He also owns Standard Bank (SGBLY), which has subsidiaries all over Africa, and Shoprite Holdings (SRGHY), the biggest grocer on the continent.
For investors who might only want a small percentage of African exposure as part of a larger frontier-market position, Johnson says two examples of frontier-market ETFs include the iShares MSCI Frontier 100 ETF (FM) and the Guggenheim Frontier Markets ETF (FRN).
Wells says investors need to consider the current investment cycle before jumping in.
“You have to consider the risk and reward. It’s something you have to look at with a three- to five-year horizon. It’s good to start paying attention to and do some homework. Also, don’t be moved by the headline risk,” he says.
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