How to Invest in Africa

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From now until 2050, the United Nations has predicted that more than half of the worlds’ population growth is going to occur in Africa. In Nigeria alone they predict that it will surpass the United States in population. The continent of Africa has long been a place of promise for the world, but has had to contend with exploitation, corruption and misinformation. The 21st century will be the African century as the focus on emerging Asian economies winds down and new growth and possibilities exist on the African continent.

There are a few ways to get involved in investing in Africa. Many of them are long-term strategies that will yield investors gains over time and help propel the African continent into a powerhouse in the world.  One of the first ways is through ETF’s and there are two of note that are interesting and promising.

Exchange Traded Funds

An ETF simply put is a marketable security that tracks a stock index or group of assets. They differ from mutual funds as they trade like a common stock on the exchange market. They have higher liquidity and lower fees making them a better opportunity for investors as opposed to investing in mutual funds.

Market Vectors Africa ETF (AFK)

The AFK ETF has holdings in over 100 companies and is one fund that has the most diversity spread throughout African countries. The majority of companies are either domiciled in the country or most of their business is done in Africa. They have a few holdings outside of Africa. For annual expenses it charges 0.8 percent, which comes out to $80 for every $10,000 an investor puts into the fund.

This fund has been severely undervalued as it has experienced sharp drops since 2014. It offers exposure to new investors in the African Market with a sense of security as well. The majority of its holdings are in the finance sector and many African banks are not traded on exchanges that American’s can easily access. Fortunately by investing into AFK they can access this market that is growing.

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Global X MSCI Nigeria ETF (NGE)

The NGE ETF is a bit less diversified than the AFK ETF, but is good if an investor wants to focus their time and energy into tracking and researching Nigerian companies and stock performance.

Nigeria is an OPEC member and one of the largest exporters of crude oil in the world. This company has investments in roughly 25+ companies based in or around Nigeria. Thus exposure is gained in the Nigerian Market. Similar to AFK, financials make up a lot of their holdings. This fund has 10% in energy, which is good because of the volatile nature of the oil industry as of late. That doesn’t mean that they aren’t affected by the change in the oil markets. Just this last year the fund was down an average of 30% in the last year.

Even so NGE is severely undervalued. Nigeria’s GDP and population are growing and this serves as one of the best entry points into the market. The only thing that investors must be wary of is their own patience with these funds. A large amount of money is not going to be made in months or even the next couple years. The growth is going to take time. There’s no promise that these funds are going to spike anytime soon or not experience more downturns. The investors who invest early and hold out will be on the frontier with these two ETFs.

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One company of note in the chart above is Dangote Cement PLC. It is part of the Dangote Group, a western African conglomerate that is the biggest on the continent. The founder is Aliko Dangote, billionaire and the richest man in Africa and arguably one of the most important figures to look towards on investing in Africa. He’s had a lot to say on the current investing climate in Africa and what needs to change.

Africa Needs Investments Not Foreign Aid

Aliko Dangote has been outspoken about foreign aid for the fact that he does not like it and thinks of it as an impediment towards African economic growth. He has stated to western nations that they should not give any aid to Africa, but instead partner with local businesses and invest instead. He has stated, ”You will make money and we’ll make money and it’s better for everyone.”

Dangote is right and this is something that needs to change if there is to be sustained permanent economic growth. A constant flow of aid money helps foster the current regimes in many African countries that are ineffective and sometimes corrupt. As the money comes in, it gives no incentive to the government to work to raise taxes for funding or fix their inherent problems.

The money is embezzled and funneled through top executives who do not put it back into the local economy. The only thing top officials must do is keep the foreign donors happy who most of the time have no idea where these donations are going. Also an influx of foreign goods stops local businesses getting off the ground and beginning to sell around their areas and export.

Governments are flexible for companies that want to invest in the country. Back to Dangote, he wanted to invest in a plant for $400 million in Zambia. There was an old law that stated in Zambia, any business set up in that company must have a 51% ownership from Zambians in order to be set up there. The local government waived this law when he stated his plans for full ownership. Now the average investor is by no means going to have that excess amount of funds, but the more people get interested in investing Africa, the more the governments are going to allow flexibility for new business ventures and investments.  Countries like China already have a major foothold in Africa.

China is Already There

Common sentiment among Western media outlets is that China has become a neo-colonial power in Africa, which is the last thing the continent needs. In actuality Africans are supportive of Chinese investment and both parties are benefitting from it.

In a recent comprehensive report (page 37) from the BBC on favorable views of countries, China fared over 65% for favorable views in African countries. Positive views have increased since the last survey was taken and there was an overwhelming positive view of them in Nigeria that year as well at 85%.

China and Africa have begun a relatively new symbiotic relationship. They’ve made trade between foreign countries more open as trade tariffs have decreased.

African Countries & Areas of Interest

The link between China and the African continent is interesting because twenty to thirty years ago China and other Asian countries were in a similar predicament. Investors who began investing early saw long-term profits.

Unlike other continents or countries the investing opportunities differ from region to region here. Some major industries that can be tapped into are the vast natural resources and commodities like oil in the energy sector. Agriculture is of course one of the most promising avenues to invest in, but it faces the problem of not having a developed infrastructure. The logistics will be the hardest part, as that must be established for these companies to grow. Though this is also another opportunity, simply building up the roads and infrastructure can contribute be a great place for investment.

As the agricultural and fundamental industries become established it will lead towards other booming areas. Once the basic needs of millions are met, this will allow for societies to look for more consumer goods. Telecommunications and banking will be an excellent area to invest in.

Countries in Africa are in varying states of development. Investing in somewhere like South Africa is going to yield different results than say investing in Somalia. It’s still a smart idea to see to the more stable or stabilizing countries than others at this point.

Potential & Diversification

Alternative investors must think outside the box more so than traditional investors. Diversification is key here as this market is vast, undervalued, and untapped. If the risks don’t scare off investors and if patience is a virtue then there truly stands no reason to not take advantage of this opportunity and begin investing in Africa.

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Mike Colagrossi is an analyst at ActivistStocks.com covering activist investors and major deals at hedge funds. He also regularly contributes to SeekingAlpha.com and has a strong interest in alternative investments and emerging markets.