December 22, 2022

Investing In Africa: How To Get Started

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. 

No comments:

Post a Comment