Digging into Africa: 3 Investment Funds

There has been much attention lately on the outperformance by emerging markets over the US. All the pundits talk about is the BRIC countries, China in particular, with an occasional nod to Taiwan or maybe Korea. So I thought I'd look more closely at Asia.

I started comparing regional indexes, going back 18 months to remove the "off the bottom" performance bias, and discovered something unexpected:

Click to enlarge

Surprise! Emerging Europe and Asia are at the bottom, the big developed markets (G7) are in the middle, and the two leaders are Latin America and Africa.

Africa? No BRIC there! Are we missing something?

(Note: I chose the fall of 2007 to get a picture of the entire bear market trend, and Nov. 1 as the starting point because that is when MSCI launched its Africa index).

So I decided I'd better start digging into what's going on in Africa.

The MSCI EFM Africa Index includes "emerging" markets South Africa, Egypt, and Morocco, and "frontier" markets Kenya, Mauritius, Nigeria, and Tunisia. (MSCI also indexes markets in Ghana and Botswana, but has not yet included them in a broader index).

According to the most recent information I could find on (June 2008), South Africa holds 77% of the total market cap of the index components. The other components might vary a lot due to the volatility of their markets as well as their currencies, but it's safe to say there is a middle tier of Egypt, Nigeria, and Morocco in the range of 5-10% each, and much smaller investments in Kenya, Mauritius, and Tunisia.

All of these combined comprise perhaps 10% of the market cap of the world's Emerging Markets. That said, some analysts would make the case that market cap doesn't represent the economy well in these countries, since the stock market captures very little of the total economic activity. So the countries with small stock markets, everything except South Africa, may have a lot more economic value that has not yet been equitized.

Within the Africa index, the YTD performance has been led by South Africa, +23%. The only down market YTD is Kenya, -19. For the month of May, however, the frontiers saw the biggest action: Nigeria +47, and Mauritius +60. (Mauritius, a small island in the Indian Ocean, has a diversified economy; as far as I can tell, there is no one industry responsible for this remarkable rally.)

There is no ETF that covers the MSCI Africa index, but there are other ways to invest in the region.

The most popular fund is EZA, the iShares South Africa ETF. It's up 69% since the March bottom. There are three big sectors: 27% materials (mining), 24% Financials, 16% Telecom. Trading an average of 300,000 shares a day, it's easily the most liquid way to access the region; and since South Africa has a large majority of the continent's market cap, that could be as good a way to play on the region's prosperity as any.

If you like to pick stocks, there are a good many South African stocks available as ADRs—11 of them on major exchanges, and many more on the OTC boards.

To go beyond South Africa, there are two other funds available. Market Vectors AFK has only about 27% in South Africa, 19% in Nigeria, 15% in Morocco, 13% in Egypt, and 26% "offshore" in companies doing business throughout the continent. This is much better diversification geographically, but the sector breakdown is not so well balanced: 31% of the investments are in banks, 19% in basic resources, 13% in oil and gas.

SPDR has an Emerging Middle East & Africa ETF, GAF. Its country weighting is South Africa 59%, Israel 26%, Morocco 8%, Egypt 5%. The sectors are led by Financials 27%, Materials 19%, Health Care 16%.

Disclosure: No position in any of the funds named. Long HMY, a South African mining stock.

Comments

[Mad Hedge Fund Trader]

Nice research. When things slow down and there is nothing to do, like now, I do deep research for the unfound investment opportunity. Feel like investing in a state sponsor of terrorism? How about a country whose leaders have stolen $400 billion in the last decade and have seen 300 foreign workers kidnapped? Another country lost four wars in the last 40 years. Still interested? How about a country that suffers one of the world’s highest AIDs rates, endures regular insurrections where all of the westerners are massacred, and racked up 5 million dead in a continuous civil war? Then Africa is the place for you, the world’s largest source of gold, diamonds, chocolate, and cobalt! The countries above are Libya, Nigeria, Egypt, and the Congo. Below the radar of the investment community since the colonial days, the Dark Continent has recently been attracting the attention of large hedge funds and private equity firms. Goldman Sachs has set up Emerging Capital Partners, which has invested $1.6 billion there. China sees the writing on the wall, and has launched a latter day colonization, taking a 20% equity stake in South Africa’s Standard Bank, the largest on the continent. In fact, foreign direct investment has jumped from $53 billion to $61 billion, while cross border M & A leapt from $10.2 billion to $26.3 billion. The angle here is that all of the headlines above are in the price, that price is very low, and the perceived risk is much greater than actual risk. Price earnings multiples are low single digits, cash flows are huge, and returns of capital within two years are not unheard of. The reality is that Africa’s 900 million have unlimited demand for almost everything, and there is scant supply, with many firms enjoying local monopolies. The big plays are your classic early emerging market targets, like banking, telecommunications, electric power, and other infrastructure. For example, in the last decade, the number of telephones has soared from 350,000 to 10 million. It reminds me of the early days of investing in China in the seventies, when the adventurous only played when they could double their money in two years because the stakes were so high. This is definitely not for day traders. If you are willing to give up a lot of short term liquidity for a high long term return, then look at the Market Vectors Africa Index ETF (AFK), which has risen 59% since March, and the SPDR S&P Emerging Middle east & Africa ETF (GAF).

2009 Jun 01 10:26 AM

[HaavBline]

Good article and very good comment from Mad.

Africa seem finally exhausted from civil wars and ready to get on with bettering their own lifes. Regardless of all the problems, they seem settling on a certain level of stability, allowing opportunities to arise.

The arival of China is most welcome locally. The Chinese offer much better options than former collonial masters, who still hang on to substantial control of any low risk resoruces of great value. The Chinese are operates at the equal level as the Africans, not high up like westerners. They bring funding at affordable costs, build infrastructure at affordable costs, and bring consumer good at affordable costs. This brings new opportunities for many African countries and brings competitions to Western interests. Good for the Africans.

The Indians will soon have similar need as the Chinese, and they are starting to follow the Chinese path to Africa. This will bring more options and opportunties to all African countries who manage to maintain social stability, regardless of its political system.

2009 Jun 03 02:00 PM

[Mad Hedge Fund Trader]

Buy when there is blood in the streets. When things slow down and there is nothing to do, like now, I do deep research for the unfound investment opportunity. Feel like investing in a state sponsor of terrorism? How about a country whose leaders have stolen $400 billion in the last decade and have seen 300 foreign workers kidnapped? Another country lost four wars in the last 40 years. Still interested? How about a country that suffers one of the world’s highest AIDs rates, endures regular insurrections where all of the westerners are massacred, and racked up 5 million dead in a continuous civil war? Then Africa is the place for you, the world’s largest source of gold, diamonds, chocolate, and cobalt! The countries above are Libya, Nigeria, Egypt, and the Congo. Below the radar of the investment community since the colonial days, the Dark Continent has recently been attracting the attention of large hedge funds and private equity firms. Goldman Sachs has set up Emerging Capital Partners, which has invested $1.6 billion there. China sees the writing on the wall, and has launched a latter day colonization, taking a 20% equity stake in South Africa’s Standard Bank, the largest on the continent. In fact, foreign direct investment has jumped from $53 billion to $61 billion, while cross border M & A leapt from $10.2 billion to $26.3 billion. The angle here is that all of the headlines above are in the price, that price is very low, and the perceived risk is much greater than actual risk. Price earnings multiples are low single digits, cash flows are huge, and returns of capital within two years are not unheard of. The reality is that Africa’s 900 million have unlimited demand for almost everything, and there is scant supply, with many firms enjoying local monopolies. The big plays are your classic early emerging market targets, like banking, telecommunications, electric power, and other infrastructure. For example, in the last decade, the number of telephones has soared from 350,000 to 10 million. It reminds me of the early days of investing in China in the seventies, when the adventurous only played when they could double their money in two years because the stakes were so high. This is definitely not for day traders. If you are willing to give up a lot of short term liquidity for a high long term return, then look at the Market Vectors Africa Index ETF (AFK), which has risen 59% since March, and the SPDR S&P Emerging Middle east & Africa ETF (GAF).

2009 Jun 08 09:57 AM