Go To Africa, Young Investor

While frontier markets in Africa are not yet the new Brazil, let alone the new South Korea, there are ample reasons to be optimistic about the economic resurgence in many African countries.

Consider:

• The number of armed conflicts in Africa has dropped from 20 in 1999 to 5 today. Granted, that's non-zero, and the human losses in the remaining fighting is horrific and unacceptable, but there is significant and largely unheralded change.
• Real GDP growth in sub-Saharan Africa (SSA) averaged 4.1% from 1997-2002, and has since risen to 6.6%
• Real incomes are rising, with GDP per capita hitting 4.6% in SSA in 2007.
• Africa has lower inflation, higher FX reserves, and more FDI than did Asian emerging markets in 1980 -- and that worked out okay.
• We're seeing bond duration extension, with government bond yield curves now stretching out to 10- and 15-years in some countries, which is a boon to project financing.

The obvious question, of course: How do you track and invest in African markets? The fast answer is, it isn't yet as easy as it should be. Yes, there are some frontier markets ETFs, including the just-launched Claymore/BNY Mellon Frontier Markets ETF, or the SSGA Emerging Middle East and Africa ETF, but they all skew heavily toward Eastern Europe and the Middle East, allocating precious little to continental Africa (outside South Africa, which hardly qualifies as a frontier market).

Nevertheless, there is a race into frontier markets in general this year, and into Africa in particular. Multiple frontier market ETFs and related funds will be showing up soon from PowerShares, Van Eck, and others. It will be worth watching.

Further reading:

African opportunities are being overlooked, Financial Times, June 11, 2008

The Frontier/Middle East ETF Boomlet, Morningstar, June 12, 2008

Claymore wins race to the frontier, IndexUniverse, June 12, 2008

Comments

[bbzz24]

I'd rather go long in the african lazyness ETF.

[buyitcheap]

TRAMX is also a candidate.

[Muddling Investor]

Political risk is not acceptable. On the other hand, it wasn't acceptable in Asia in 1980s either.

[badra818]

The latest issue of Fast Company is a must read if you want to understand China's strategy in Africa. Not always good, but it's a win-win relationship according to both Chinese and Africans.
www.fastcompany.com/ma...

[badra818]

Time to Invest in Africa? You be the judge!
www.cnbc.com/id/158402...

[ElCidCampeador]

Managed risk = reward, plain and simple. With the current bull market in commodities (ags, base metals, precious metals, oil, and nearly everything else), Africa is the focus. With arable land, untapped mines, and underdeveloped capital markets, it is going to see some significant growth in the next decade. The Middle East is investing heavily in African infrastructure, and along with China, Canada, and the US focused on sourcing resources, it is the place to go. Is it too risky? For some, it obviously is...

[dfloydr]

A few companies make sense, for example Sasol, but most of Africa is still riddled with corruption.

South Africa has succumbed to the disease. Companies are being told that they now have three consultants to manage their relationship with the government. These three never show up but they are to be paid big consulting fees which are to be applied to their coming to own say 15 - 25% of the company stock. Nice no show jobs with big rewards.

The recent power outages were no mystery. Escom, the national power company, used to maintain large inventories of coal. The new owners sold off their coal inventory to China last year given the high price of coal, and as a result they were able to show a big profit and get paid huge bonuses. That set up a vicious downward spiral. Without inventories of coal at power plants, when any glitch showed up, the power company could not put out electricity. With no electricity local mines could not produce coal .....

No thanks, Africa's human risks are outside of my ability to evaluate what turn might suddenly crop up to destroy the value of my investment.

[badra818]

dfloydr, for your info South Africa no longer is an emerging market; at least not at the very early stage as most of these other countries. Corruption is a problem in all countries even here in the States. What were those Enron employees to do when their pensions went down the drain? Sue the company's executives and how has that worked for them? What do you have to say when company CEO are being compensated for failing? I'm talking about Countrywide here! Invest anywhere, but there are unforseen risks just about everywhere or keep your money in a savings account!

[Aly-Khan Satchu]

The African renaissance started some years ago. The clearest evidence of this is given by the returns that have been generated in SSA post 2002. Kenya has returned [and this replicated across the entire Continent] near enough 600% in $ terms. Crude Oil has returned 697% from trough to peak! Clearly, this is something that cannot be ignored.

Some of the comments above also touch on what I call the 'Bob Geldof Live Aid discount'. For many, Africa will always be the Dark Continent. This too is an opportunity. When I look at something, I dont have 1000s of MBA graduates doing the same. I consider that an advantage. This discount is narrowing.

The big picture is that Africa is undergoing a late stage Industrial revolution. In the 21st century, it can all happen in a very short space of time, as if it were on 'steroids'. Businesses are relatively straight forward and not over complexified with assets that no Management or employee understands. The greatest opportunity lies in finding businesses that are creating scale out of previously fragmented markets.

Its a no brainer.
Aly-Khan Satchu
rich.co.ke