By David Berman
If you feel as though you've missed out on the early days of China's big growth story, you could always turn your attention to Africa.
The continent certainly has its challenges – and it is usually pegged as a “frontier” market, which is a significant step below “emerging” markets in terms of stability -- but an increasing number of observers have begun to point out its rising potential for investors.
“Most emerging market growth stories are well known, and foreign investors have bought into them extensively,” said Pierre Lapointe, global macro strategist at Brockhouse Copper, in a note. “ Investors know these stories so well that in some markets, they have pushed equity valuations to levels that are sometimes hard to justify.”
Africa, on the other hand, looks cheap. But of course, there's a reason for this low valuation: Infrastructure tends to be poor, corruption is endemic, currencies are volatile and poor liquidity has scared off most institutional investors.
Therefore, Mr. Lapointe recommends indirect investments – buying stocks of companies that do business in Africa.
Commodity producers are an obvious choice, given that Africa is a resource-rich area. However, they might not be the best plays if China's economy slows down and the resource “supercycle” draws to an end in the coming years. Plus, even if the commodities boom persists, it really taps into global demand rather than Africa's emergence.
The better bet? Invest in companies that can tap into Africa's domestic growth.
As Mr. Lapointe argues, rising gross domestic product in the sub-Saharan region suggests broad-based growth. And if other emerging economies are any example, Africa will soon devote a large proportion of its GDP to capital investments.
“For African GDP growth to reach higher levels, the continent's infrastructure will need to be improved on a massive scale – and this would entail a ratio of investment-to-GDP much higher than the current one,” he said. “This means that Africa could be on the cusp of an investment boom, which would benefit global infrastructure companies active in the region.”
He ran a screen to find non-African, non-resource companies that have significant exposure to Africa. The results range from construction and engineering firms to machinery and wireless telecommunications sectors.
The U.S.-traded names include: SMART Modular Technologies (NASDAQ:SMOD), Millicom International Cellular SA (MICC), UTI Worldwide Inc. (NASDAQ:UTIW), Layne Christensen Co. (NASDAQ:LAYN) and Cummins Inc. (NYSE:CMI).