Investing In Africa

The Barron's cover story was about investing in Africa. The article covered some stats, some risks, some of the story on the ground and a surprisingly incomplete list of investment choices. Africa has been the next big thing for a long time and may continue to be the next big thing for years to come.

There are a few things that I believe are absolutely true which include the continent being incredibly resource rich, quality of life improving (not implying anything close to typical US quality of life) and countries modernizing. Just as true is that corruption and violence abound and there can be no reasonable assurance that Africa will ever be the here and now as opposed to the promise of the future.

The country of South Africa has of course been accessible for years. The iShares MSCI South Africa Index Fund (EZA) has been around for years and if you look under the hood of that fund you will see many individual stocks that have traded in the US for a long time as well like Sasol (SSL), Anglo Gold Ashanti (AU), Gold Fields Limited (GFI) and so on. Another choice is ASA Limited (ASA) which is an actively managed closed end fund which at times has been very heavy in South Africa but not lately.

Not mentioned in the article were the two ETFs from Van Eck; Market Vectors Egypt Index Fund (EGPT) and the Market Vectors Africa Index ETF. Reasonably speaking the story in Egypt is a little different than most of Africa but AFK would certainly seem to be right in the wheelhouse with small exposure to many countries including Ghana, Mali and Kenya along with big exposure to Nigeria and South Africa. There are also some broader frontier funds with exposure to Nigeria as well and other funds that combine Africa with the middle east.

Nigeria strikes me as being a very complicated investment destination. The population is huge and the country oil rich but there is a lot of violence (relative to the other countries with stock markets) and corruption.

From the sector level the argument for banks is that a big part of development will come from money lent/invested by banks. Based on the Barron's article the banks in Africa are generally nowhere near as bad off as banks from the US and Western Europe. I can't vouch for that one but many banks in emerging and frontier markets do have few moving parts than their more "sophisticated" counterparts.

The case for materials is that the wealth effect will start here with the mining and exporting of resources. This is a valid way to go and true of Brazil but of course the big mining companies won't really capture the story on the ground to the extent that matters to you.

Consumer stocks will capture the story on the ground. You know what this is about, the wealth created from mining in turn creates a middle class (to be thought of in different terms from US middle class) of people who buy personal goods and have better diets. Despite this happening in some countries there will obviously still be plenty of very poor people on the continent who will not benefit from this in our lifetimes.

Often in past posts I've talked about telecom being a very easy way to access a country because every country has a large phone company. This may not be so easy in Africa because of very little wireline infrastructure. The Barron's article refers to how many people have made cell phone calls. In places like this it makes more economic sense for this type of infrastructure to be wireless which means large foreign companies, like France Telecom (FTE), can end up being the local phone company. FTE might be a good hold but how big a piece of the pie can Mali be for FTE (made up example)?

From the country level, well maybe instead of country it should be regional--the Barron's article talked a lot about East Africa and Sub-Saharan Africa. Perhaps countries should be grouped together in categories somehow?

Yet another way in could be certain companies domiciled elsewhere but that do a substantial part of their business in Africa. One company that comes up in this context, including the above Barron's article, is Tullow Oil (TULOY) which is based in the UK but is a big kahuna for oil in Uganda and Kenya.

My still evolving take is that exposure will be very important but it is difficult to access. For now I'd rather not use up my mining exposure with large South African companies, I would rather try to capture the story on the ground and avoid Nigeria. I've studied Sasol (SSL) before but have never owned it. There are some consumer stocks like Shoprite (SRHGY) that look interesting but average volume for the ADRs is only 2000 shares which I think would be ok for an individual but not something I could buy for clients and hope to get out of if I had to so clearly this is a work in progress. And we haven't even talked about Madagascar (pictured above) which also has some things going for it.