May 3, 2021

Emerging Markets In Africa: Should You Invest?

As a smart investor, you know that a diverse portfolio tends to yield the best results. Many investors stick with domestic stocks and bonds for their portfolio but branching out to emerging markets in Africa and other spots around the globe can be a profitable option for many investors.

Emerging markets and frontier markets stem from economies that are either less developed than markets in places such as the United States, Japan, and the European Union, as well as countries that simply have not historically allowed as much access to their markets.

 

For instance, Vietnam is an emerging market that has not yet reached first world status but is making strides toward that goal. Iceland, on the other hand, has a strong economy and high standard of living but is emerging because access to its stock and bond markets has been limited. As the focus of this article is investing in frontier and emerging markets in Africa, we will explore the following:

     Why invest in emerging market countries from Africa?

     Conducting the right research

     Learning about the country

     Analyzing the company/companies

Emerging Markets in Africa

Why should you consider emerging markets in Africa? Africa is a continent that features many emerging and frontier markets which may provide investors with some excellent financial opportunities. While these markets can be a riskier option, there is the potential for excellent long-term growth. There may be a bit more risk, but you also have the possibility of a solid return on investment.

 

It can be smart, in general, to mix in a few of these somewhat riskier investments along with your more conservative investments. Over time, this can yield a more substantial result. As with any investment opportunity, doing a bit of research is important, but it is especially important when you opt for investments that carry a bit of extra risk.

 

Conduct The Right Research

Research is crucial for any type of investing, but when it comes to emerging market investments, we recommend that you conduct the following research.

 

Learn About The Country

While you may be purchasing stocks or bonds from a private company or companies in Africa, it is smart to learn about the country where these companies are headquartered. Check the countrys GDP, or Gross Domestic Product, and learn a bit about the debt level of the country. Another good indicator would be taking a look at the countrys foreign reserves.

 

Gross Domestic Product

First, lets talk about GDP. This is simply the value of all of the goods and services a country produces during a single year. For instance, the United States had a 2019 GDP of about $21 trillion, while China had a GDP of about $14.3 trillion and Italy had about $2 trillion.

 

On the African continent, lets look at two nations on opposite ends of the spectrum. GDPs in Africa ranged from Nigeria, which had a GDP of about $442 billion in 2020 to countries such as Cape Verde, which has an estimated 2020 GDP of less than $2 billion. Countries with larger GDPs tend to have healthier or more robust economies therefore you might expect that an investment in Nigeria might be a safer bet than an investment in Cape Verde. 

 

Debt-To-GDP Ratio

A countrys debt level is another important factor to consider. We hear a lot about the debt level in the United States, which is how much money the government owes. The government spends more than it earns so in order to continue offering services, it issues bonds and treasury bills to cover these costs.

 

Typically, when economists talk about debt level, they are talking about a countrys (or a companys) debt-to-GDP ratio. This is simply when we compare how much a country or company earns in comparison to how much it owes. Many counties, including the United States, Japan, Italy, and Greece often owe more than they produce or close to that amount.

 

In general, when a country has more debt than profit, it is less likely that they will be able to pay back their debts. With countries such as the United States and Japan, this is not as much of a worry as it might be with a country such as Greece, which has a weaker economy in general.

 

Throughout the African continent, the debt-to-GDP ratio varies tremendously. For instance, Nigeria is estimated in 2020 to have a debt-to-GDP ratio of about 34%. Cape Verde, the other African nation we used as an example for GDP has a debt-to-GDP ratio of about 127%. When we look at the GDP and the debt, its even more clear that Nigeria has a stronger economy than Cape Verde.

 

Just as a reference, the United States had a debt-to-GDP ratio of about 79% in 2019, so emerging markets certainly arent the only nations with substantial debt although it may be more difficult for emerging nations to repay debt than it would for a country such as the United States.

 

Foreign Reserves

Countries often hold currency from other nations as well as assets such as gold to help bolster their own currency. These reserves are held by the nations central bank. In the United States, the Federal Reserve System is our central bank. In Nigeria, the central bank is simply called the Central Bank of Nigeria. In Cape Verde, the Bank of Cape Verde serves as the central bank.

 

In the United States, we have about $129 billion in foreign reserves while Nigeria has about $35 billion, which is the highest in Africa. Cape Verde has less than $1 billion in foreign reserves, which can make it more difficult for that government to stabilize its currency. China has the most foreign reserves of any country, with more than $3 trillion in reserves.

 

In general, countries with a larger foreign reserve (also called FX reserves or forex reserves) tend to have more stable economies. When you look at these types of factors, such as GDP, debt and forex, it helps you gauge the risk factor of investing in a specific nation or a company in that nation.

 

Look At The Company

When you buy stocks, you are purchasing a piece of a company. When you purchase bonds, you are lending a company money. Whether you purchase stocks or bonds, it is wise to look at the companys financials before you invest. We recommend that you study both the country of origin as well as the companies themselves to make the best possible financial decisions. 

 

If you decide to opt for a mutual fund or exchange-traded fund, which includes multiple holdings, research each of the holdings within that fund, particularly the companies that are weighted more heavily. In some cases, the weight will be distributed fairly evenly, but those top holdings tend to have the most effect on earnings and losses.

 

When looking at foreign companies, especially in emerging and frontier markets, its important to look at several factors. These include looking at the financial history as well as the financial projections. Looking back in time can provide you with a solid picture of the overall financial success of the company, but its certainly not the only factor.

 

After all, perhaps the company has had several years with poor earnings and debt acquisition, but the company principals have changed. The new management team might improve the health of the company, so it can be smart to look into the histories of some of the upper management team as well as taking a good look at the business itself and how it supports the community and the nation.

 

With emerging markets in Africa, you are taking a bit of a risk, but on the plus side, you have a unique opportunity to potentially grow your portfolio while also helping to improve the economy of an emerging nation. When you invest in a company such as Amazon or Google, its stable and safe but not particularly interesting, while an investment in an emerging nation can be more rewarding.

 

For instance, lets talk about a business near and dear to our founder, Larry Serumas heart. Feronia, which is an agribusiness operating in the Democratic Republic of the Congo (DRC), manages three palm oil plantations in the DRC, one of which was established more than a century ago.

 

These plantations employ thousands of people, and the palm oil produced at these plantations is sold domestically, which helps reduce the countrys reliance on imports. Additionally, Feronia provides medical support and educational resources in the communities near these plantations. This type of investment can be a solid option for anyone wanting to include socially responsible investments in their portfolio.

 

This is just one example of a potential emerging market investment. While we arent recommending this investment over any others, it simply showcases how your investment truly makes a positive impact on a community and a nation. Emerging market investing can be both profitable and philanthropic, provided you engage in some research about each investment.

 

Learn More About Africa Investing

While we might make an emotional push toward investing in emerging markets in Africa and around the world, we know that the ultimate goal of an investor is to build their wealth. Designing a balanced portfolio with many conservative investments provides you with the opportunity to also include a few potentially riskier investments, such as those in emerging and frontier markets.

 

To keep up-to-date with African investing news, follow our blog, Money Watch Africa. This includes insights into emerging markets in Africa as well as tips and market insights from our founder, Larry Seruma, who has been writing about investing in Africa for more than a decade. 

No comments:

Post a Comment