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5 Reasons To Invest In Africa

African equity exchange-traded funds have soared over the past year, as the resource-rich continent is growing quickly, with low debt levels and a youthful and increasingly middle class demographic, but there are near-term risks to consider.

Global consultancy Ernst & Young believes Africa is the second-most-attractive investment destination, behind the U.S.

In his recent interview with ETF.com’s Alpha Think Tank, geopolitical strategist Ian Bremmer also singled out Africa as his No. 1 region poised for significant economic growth in the coming decade.

According to Arthur Childs from advisory firm Arch Financial Planning, a number of asset managers believe Africa should be part of a mainstream equity portfolio for long-term investors. In a note to clients, he gathers five points from asset managers Alquity and Neptune Investment Management to state why investors should take note of this continent.

1) Africa has an exciting resource story

Africa has rich resources in oil, natural gas, minerals, food and arable land. It has a land mass equivalent to Europe, the U.S, India, China and Argentina combined. Non-oil output is also expanding thanks to reforms in the energy sector.

2) Expanding economy

The International Monetary Fund predicts that seven out of 10 of the world’s fastest-growing economies between 2011 and 2015 will be in Africa. Many sub-Saharan countries’ growth is predicted to rise from 5 to 5.5 percent per year as they emerge from the financial crisis.

3) Low debt levels

Africa has better debt to GDP levels than some developed countries. Alquity said that while the U.K.’s debt level is 77 percent, Nigeria’s is just 16 percent.

4) Growing workforce

Africa is enjoying a growing middle class and a youthful workforce, already equivalent to that of India. A growing consumer base will also be a positive for the economy.

5) Low correlation to other markets

Africa is relatively uncorrelated to developed and emerging equity markets, with a correlation of 0.27. According to Alquity, stocks are more driven by domestic factors. However, if China has a slower landing than expected, there will be weaker demand from African exporters and a knock-on effect on commodity prices.

There are four U.S.-listed ETFs tracking African equities—one that canvasses the entire continent and the others single-country-targeting South Africa, Nigeria and Egypt. They are:

  1. AFK is a fund that covers stocks all around the continent—from North Africa to big countries in sub-Saharan Africa to South Africa

  2. It has gained almost 19 percent in the past year

  3. AFK has an annual expense ratio of 0.81 percent, or $81 for each $10,000 invested.

  4. It has $127.7 million in assets under management

  5. It includes companies that derive at least half of their revenues in Africa, meaning it holds companies domiciled in non-African countries. But its top three country holdings are South Africa, Egypt and Nigeria

These are precisely the very countries that are the focus of the three single-country securities noted above. These three single-country securities are:

  1. EZA has gained more than 18 percent in the past year

  2. EZA is a fund that with its top three sector weightings in financials (27 percent); basic materials (almost 21 percent); and technology (more than 15 percent)

  3. EZA has an annual expense ratio of 0.61 percent

  4. It has more than $575 million in assets under management

  1. NGE has gained almost 11 percent in the past year

  2. NGE is a fund that with its top three sector weightings in financials (37 percent); energy (almost 29 percent); and consumer non-cyclicals (20.55 percent)

  3. NGE has an annual expense ratio of 0.68 percent

  4. It has $20 million in assets under management

  1. It has gained more than 55 percent in the past year

  2. EGPT is a fund that with its top three sector weightings in financials (almost 37 percent); telecommunications (almost 18.27 percent); and energy (more than 17 percent)

  3. EGPT has an annual expense ratio of 0.98 percent

  4. It has $71 million in assets under management

3_Africa_ETF_Returns
3_Africa_ETF_Returns

Chart courtesy of StockCharts.com

Looming Risks

However, there are near-term risks in Africa to consider, including the rolling out of tighter monetary policy. An inflation target and more exchange rate flexibility is needed. There is also a vulnerable greater fiscal debt situation, especially in the countries that rely on foreign capital inflows.

Arthur Childs warned that only clients with a higher risk appetite and a long-term horizon should consider investing a maximum of 3 to 6 percent of their portfolio in Africa.

“It will hopefully be clear from what has been said that investors with a very cautious attitude to risk or whose capacity for loss is small should not consider investing any of their money in an Africa fund, or indeed in an emerging market fund,” Childs wrote.

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