December 22, 2022

Investing In Africa: How To Get Started

Investing in Africa

With more than 50 countries, Africa is a diverse continent with fast-growing economies and many investment opportunities in a wide range of sectors. From mining to infrastructure to energy, making an investment in Africa can be an excellent option for many investors.

Africas Economic Growth

Global economic growth, in general, has slowed over the past few years with the Covid-19 pandemic, inflation concerns, supply-chain issues and other factors. While growth also has slowed in Africa, most African nations are still seeing steady, if slower, GDP growth.


The countries with the highest GDPs in Africa include Nigeria, South Africa, Egypt, Algeria, Morocco, Kenya, Ethiopia, Ghana, Angola, Tanzania and the Cote DIvoire. Typically, these might be considered the countries with the strongest, most stable economies although not all of these nations have been classified as either emerging markets or frontier markets.


Of these nations, two (South Africa and Egypt) are considered emerging markets, while Kenya, Nigeria and Morocco are considered frontier markets. Cote DIvoire also would be considered a frontier market as part of the West African Economic and Monetary Union (WAEMU). The WAEMU also includes several other nations including Benin, Burkina Faso, Guinea-Bissau, Mali, Niger, Senegal and Togo.


Tunisia, which has the 12th highest GDP in Africa is ranked as a frontier market, and Mauritius, also classified as a frontier market, is not ranked in the top 30 GDPs in Africa, yet it is considered by the World Bank to be one of the stronger economies in Africa. Therefore, while GDP can be one indicator of a countrys success, it doesnt paint the entire picture.


Why Should You Consider Investing In Africa?

While investments in developed markets tend to carry less risk than investments in emerging markets or frontier markets, investing in Africa can prove to be quite profitable. The African continent offers several advantages over many developed nations.


Young Population The median age of people in Africa is just 18 years old. Compare that with Europe (42 years) and North America (35 years), and you find a population that is driven by the need for goods and services. In the continents with older populations, the focus is often more heavily based on health care and entitlements.


Natural Resources Africa is rich in natural resources, and the United Nations estimates that about 30% of the worlds total mineral reserves are in Africa. This includes as much as 40% of the worlds gold and about 90% of platinum and chromium. More than 12% of oil reserves and about 8% of natural gas reserves also are found in Africa.


Additionally, minerals such as cobalt, lithium, tantalum and many other much-needed minerals are available in abundance in Africa. For instance, more than 60% of the worlds cobalt was mined in the Democratic Republic of the Congo. Cobalt is one of several minerals used in the production of cellular phone batteries, so this mineral is in great demand.


Increasing Capital Flows This is an indicator of how money flows into countries for the purpose of investing. If you compare fund flows to Africa versus BRIC fund flows (Brazil, Russia, India, China), only China had a greater influx of capital flow in recent years. Foreign direct investment (FDI) in Africa was more than $80 billion in 2021, according to the United Nations Conference on Trade and Development (UNCTAD).


Obviously, Russian investing was affected by the invasion of Ukraine, but Brazil and India are strong emerging markets popular with investors and neither saw increases in capital flow as strong as those on the African continent in general. This metric can be a good indication that investing in Africa has been shown to yield positive results for many investors.  


Social Responsibility If you are looking for socially responsible investment opportunities or impact investing opportunities, investing in Africa can be a good option to consider. Investing in companies owned and operated by Africans or investing in companies that are improving infrastructure or perhaps improving agriculture in specific countries or regions.


How To Invest

One of the easiest ways to invest would be to purchase shares in an ETF or mutual fund that focuses on investing in Africa. It might be a general Africa ETF or South Africa ETF or perhaps an emerging market ETF or frontier markets ETF. These can be easily bought and sold by individual investors and, because they are diversified over many holdings, this can minimize risk.


Throughout the African continent, there are more than 25 stock exchanges representing more than 35 African countries, and foreign investors can purchase shares. This is a more complicated option, but if you find a company or companies that spark your interest, this can be an option to consider. You will need to go through a brokerage firm to purchase stock.


American depository receipts (ADRs) are yet another option to consider. These are certificates issued by a depository bank in the United States that trade on American stock exchanges but represent shares in a foreign company. These can be relatively easy to access, but they also can involve additional fees and taxes. We recommend discussing ADRs with your financial advisor and considering the possible risks and benefits of this type of investment.


Another option might be to explore various venture capital funds and private equity firms that focus on investments and projects in Africa. This can much more complicated than going the ETF route and offers less liquidity than ETFs, but you can discuss your options with your financial advisor to see what might be available. It is important to note that this is often not an option for every investor because the initial investment cost may be high, and the risk may be higher than with an ETF or mutual fund.


In general, the smart Africa investor will research each investment opportunity carefully to assess risk. If you are opting for an ETF, for instance, study the top 10 holdings and do some research about the fund managers and the historic performance of the fund. Africa is a continent of opportunities, and we encourage investors to do some research and consider adding some type of investment in Africa to their portfolio. 

Frontier Markets 101: Helpful Facts For Investors

Investment in Africa

If you’ve been looking for new ways to expand your portfolio, investing in frontier markets can be an option to consider. While these markets can be riskier than investments in developed markets, there are some excellent opportunities available.

Market Classifications: What Is A Frontier Market?

Several organizations classify markets including MSCI (Morgan Stanley Capital International), S&P Dow Jones and FTSE (Financial Times Stock Exchange). Many factors are considered when classifying countries including political stability, ease of market access, liquidity and more.


Typically, the more stable the government and the economy, the more likely the country will rank as developed or emerging, although this is not always the case. For instance, Iceland is considered a frontier market, yet it boasts one of the highest standards of living on the planet and has a stable government. Yet, access to its market is limited, thus it is not yet classified as a developed market.


Market status is updated frequently, and while changes are rare, they do sometimes happen quickly. Russia is a prime example of a country whose status changed almost overnight. After the invasion of Ukraine, Russia was downgraded from an emerging market to either a standalone market (MSCI and S&P Dow Jones) or simply removed from classification lists due to the high level of political instability in that country.


In some cases, such as with Greece, this nation was upgraded to developed market status but after the nation experienced a severe economic downturn, Greece was downgraded to emerging market status.


Frontier Markets In Africa

In Africa, which is the area we concentrate on here at Money Watch Africa, two nations have attained emerging market status. These include Egypt and South Africa, both of which maintain relatively stable governments and market access is greater than it would be with a frontier market.


While investing in an Egypt ETF or South Africa ETF can be a good option to consider, more and more African frontier markets are opening up to investors, so lets take a look at the frontier market countries on this diverse continent.


The West African Economic and Monetary Union (WAEMU)  This group of nations includes Benin, Burkina Faso, Cote dIvoire, Guinea-Bissau, Mali, Niger, Senegal and Togo. The WAEMU is classified under frontier status by MSCI but is limited to securities in Benin, Burkina Faso, Cote DIvoire and Senegal.


Botswana  This landlocked nation in southern Africa is ranked as a standalone market by MSCI and as a frontier market by S&P and FTSE. As with many African nations, Botswanas economy is growing quickly and is a top exporter of diamonds as well as minerals such as gold, copper and nickel.


Cote dIvoire  Cote dIvoire is listed as an MSCI frontier market as part of WAEMU, and both S&P and FTSE classify this nation as a frontier market on its own. Located in West Africa, this nation has one of the regions most stable economies and is the worlds top exporter of cocoa beans as well as a top exporter of cashews, palm oil and coffee.


Ghana  Located in West Africa, adjacent to Cote dIvoire, Togo and Burkina Faso, this nation is listed as a frontier nation by MSCI, FTSE and S&P. While Ghanas economic growth has not been as strong as some other frontier markets, Ghana is still a top exporter of cocoa beans, gold and other minerals.


Kenya  Ranked in frontier market status by MSCI, FTSE and S&P, Kenya boasts the largest economy in east-central Africa. With a strong and growing middle class, Kenyas economy is bustling, with many opportunities in telecommunications, infrastructure and mining.


Morocco  Morocco is ranked as a frontier market by MSCI, FTSE and S&P, and has one of the best quality-of-life scores on the African continent. Moroccos main exports include agricultural products, textiles and phosphate-related products.


Namibia  S&P ranks Namibia as a frontier market, and this Sub-Saharan African nation is a country abundant in natural resources with diamonds being a top export along with uranium, lead, tungsten and silver.


Nigeria  Nigeria is the most populous country in Africa and the seventh most populous nation on earth. Not surprisingly, Nigeria also has the largest economy in Africa and petroleum-based products are the nations top exports. MSCI, FTSE and S&P all rank Nigeria as a frontier nation.


Tanzania While only FTSE ranks Tanzania as a frontier market, this East African country consistently has enjoyed steady economic growth. Primarily focused on agriculture, Tanzania exports cotton, coffee, and cashews. Mining is another importunity industry, and gold mining is the top mining export.


Tunisia  This northern African nation is consistently listed among African countries with the highest standards of living and quality of life. Tunisia is ranked as a frontier nation by MSCI, FTSE and S&P. 


Zambia  This nation, ranked as a frontier market by S&P, exports about 70% of the copper found on the African continent. Agriculture is another top industry with sugar, tobacco and cotton being among the top exported crops.


Zimbabwe  Zimbabwe is listed as a standalone market by MSCI but remains unranked by S&P and FTSE. In general, standalone status can be a sign that a country is being looked at for a possible move toward frontier market status.


How To Start Investing In Frontier Markets

Investing in developed markets is extremely easy, and even emerging markets provide easier access for investors. With frontier markets, the options are more limited, but there are some good options to consider.


The easiest way to invest in frontier markets is to select either a mutual fund or exchange-traded fund that concentrates holdings in frontier market nations. These can be easily bought and sold by investors using an online brokerage firm or through your financial advisor.


For instance, you might look for an Africa ETF or a frontier markets ETF. ETFs are similar to mutual funds in that they tend to be heavily diversified, which can minimize risk. The advantage of an ETF is that this type of investment can be bought or sold throughout the trading day, whereas mutual fund values are set at the end of the trading day.


Other options include investing in Africa via American depository receipts (ADRs), which are certificates issued by U.S. banks and which trade on U.S. stock exchanges and represent shares in foreign companies. These often are subject to high fees and taxes, so its wise to talk with your financial advisor before opting for ADRs.


For investors with an abundance of capital, you also could consider looking at the investments offered by venture capital and private equity firms. This is a more costly and more complicated route than either ETFs or ADRs and not a great option for smaller investors, but if you are interested in making a substantial investment in Africa, this could be something to consider.


In general, investing in frontier markets is considered riskier than investing in developed and emerging markets. However, these markets also potentially can provide substantial yields. With an ETF or mutual fund concentrated on a frontier market, you tend to minimize risk as these are diversified.


Before making any investment decisions regarding frontier markets or any other markets, we always recommend researching the investment opportunity carefully looking at the holdings, the fund managers and the historical performance of the fund.