BEYOND BRICS: The Opportunities & Risks of Investing in Africa

22nd September 2011

But what of the frontier markets – those that have yet to hit emerging status such as much of Africa? Once seen as a perpetual basket case, investors have woken up to its human and mineral riches in the past few years but few have yet seen much in the way of real returns.

The investor flight to safety has led to a sell-off of emerging market stocks – better to get something out now than perhaps nothing later. The result is that the main FTSE All Emerging Markets All Stock index is down 18% since the start of the year – on the same basis, US large stocks are only down 4.9%.

To add to the misery, emerging market currencies are headed south. The Financial Times shows the Indian rupee is down 6.5% against the dollar so far this year, the Brazilian real is a negative 6.8%, while both the South African rand and the Turkish lira have lost over 14%. The BRIC nations are, at best, sleeping in their CRIB.

Investors in Africa have been hit by the fall in the rand. And while some countries have rough and ready stock markets, South Africa is almost a mature market.

Indices covering Africa can be inaccurate although they all show the trend. Investors have to appreciate that countries on the continent are at different stages of development including attitudes to external investment and to stock exchanges. Botswana is far wealthier than Sierra Leone, for instance, and offers investors a better infrastructure. 

Over the past decade share prices increased nearly three fold. But since then, nations in Africa have been hit as hard as those in any other developing market area.  Some of the small number of funds specialising in the continent outside of South Africa have fallen 15 to 20% this year – again part of the flight to perceived quality, which has seen European and North American fund managers batten down the hatches.

The bullish case for Africa is well rehearsed by the still relatively This includes:

·       A growing middle class of consumers – estimated at some 300m (not far short of India or China)

·       A very young population – two thirds are under 30

·       Fewer civil wars – with some countries operating western-style democracy

·       A low cost labour force – important as wage inflation hits China

·       High commodity values  – although prices have fallen from peaks.

·       Chinese investors are spending billions on better infrastructure

·       Mobile phone technology has enabled huge swathes of population to by-pass the copper wire stage of development.

While pointing out the need for patience and the risks involved, The Wall Street Journal paints a generally positive picture of investment in Africa at 

But there is also a bear case – including some of the above factors turned on their heads.

·       Will there be enough jobs to cope with the high birth rate?

·       Stock markets are often inefficient – selling, especially, can be tricky and investors do not want to feel locked in

·       Africa is too dependent on commodity values

·       Political violence can break out – normally peaceful Kenya was convulsed following disputed elections in 2008. And while the Arab spring (North Africa is part of some Africa funds) is great for democracy, it is not a good example of stability.

·       Chinese spending could benefit China more than Africa

·       Recession-hit European and North American markets will cut demand for raw materials and finished goods.

The East African quotes a survey suggesting that only 14% of institutional investors consider Africa as a region that offers attractive opportunity.  

The East African suggests that an emphasis on private equity deals could see any further stock market advance put into the further future.

Investing in Africa – the practicalities

Frontier markets such as Africa are high risk. But the facts and figures so far this year do not point to substantially higher risks than better known emerging markets. So how do investors with an appetite for volatility and the patience to wait put their money into the continent?

One route is the exchange traded fund. One of the most prominent is the Mar ket Vectors Africa Index ETF. The other is a fund from a specialist fund manager such as Alquity Africa or South Africa based Investec – its one year old African Opportunities Fund is down 22% so far this year. Overall, the choice of funds that UK investors can easily access is low – another problem for investing in Africa whatever the long term potential.

More from Mindful Money:

BRICs: What has happened to the building blocks of global growth?

No BRICs cavalry to help the euro zone

Sign up for our free email newsletter here, for your chance to win an iPad 2.

Leave a Reply

Your email address will not be published. Required fields are marked *