Investing in Africa with ETFs
Globe-leading Growth Stuns Even the IMF
Are you still sleeping on Africa?
International Monetary Fund Chief Dominique Strauss-Kahn is there this week to say he underestimated the continent's resilience.
The IMF is revising its full-year 2010 economic growth estimate for Africa from 4.3% to 4.5%, making it the leading region in the global economic recovery.
Africa's resurgence is largely the result of help from the Washington-based institution, but Strauss-Kahn warned an audience in the Kenyan capital of Nairobi that vigilance is key to turning recovery into stability: "Africa will continue to face large, persistent and costly shocks. Without a secure standard of living, people might turn to unproductive or even violent activities, possibly leading to instability, a breakdown of democracy, or war—all compounding the initial suffering."
As IMF Managing Director, Dominique Strauss-Kahn, a French economist, speaks for a large lender that has been the target of developing-world ire, even as it bailed out the weakest nations. IMF help usually comes with structural adjustment conditions that mean in order to get money, national governments have to make big cuts.
When the global recession rolled toward Africa like a tidal wave in late 2008, Strauss-Kahn and the macroeconomic maestros he leads took a different approach: they allowed African countries to expand their budget deficits and encouraged loose monetary policy to keep cash flowing. Inflation has been kept in check by zero-interest IMF loans that helped bolster currencies like Ghana's cedi against the dollar.
The Fund's Africa director now says 2009 growth doubled IMF expectations, so the IMF is now saying Africa grew by 2% instead of 1% last year.
Everyone there hopes that the momentum created by international lending can carry Africa into the 2010 World Cup in South Africa, and that greater visibility for maturing African markets will draw more investors like you.
So let's look at what Africa has to offer U.S.-based shareholders.
Africa Plays Leading the Way
It is true, if a bit trite, to say that children are the future. On the poorest continent, kids can either grow up swinging AK-47s or they can leapfrog schoolchildren in wealthier places with emerging technology like mobile phone payments.
In Kenya, 21 million people out of the 36 million population are expected to have mobile phones by the end of 2010. Of those new telecommunication customers, 6 million already use a system called M-PESA — m from mobile and the Swahili word for money — to exchange money and manage their bank accounts with just their handsets.
More than 4 of every 5 businesses in sub-Saharan Africa use mobile phones as their primary line of communication, since fixed-line infrastructure is weak or non-existent.
In Somalia, which hasn't even had a stable government since the early 90s, mobile money transfers through networks named Sahal and Zaad mean you don't have to carry cash or race to find a phone when violence breaks out and you want to reach loved ones.
The desire for communication in emergencies is something that has driven mobile telecoms growth all around the world, from volatile regions like Africa and the Middle East to peaceful places like the U.S., where a quick roadside 911 call can save your life.
Now, international mobile phone giant Vodafone (NYSE: VOD) has chosen Kenya and seven other African markets to debut its Vodafone 150, which it calls the world's cheapest cell phone. Vodafone, which was established in the UK 26 years ago, has been eager to tap African mobile phone trends and expand them into other emerging markets like China and India.
With mobile payment systems like M-PESA, Africa is leading rather than following... and using its traditional weakness in infrastructure to its advantage in wireless telecoms.
Computer companies are also eager to make their mark in Africa, starting with kids in the One Laptop Per Child campaign. Advanced Micro Devices (NYSE: AMD) was an early partner with the Massachusetts Institute of Technology to develop rugged, portable computers, and its chips are featured in the motherboards of OLPC's XO series laptops.
During his March trip, Dominique Strauss-Kahn is speaking at universities in South Africa, Kenya, and copper giant Zambia, stressing the importance of turning Africa from a dependent continent into one where capital markets can lead development. With IMF money, Kenya and its neighbors have increased budgets for health care and education, rather than tightening such social spending as the IMF has demanded with past loans. The new model seems to be that quality of life comes first, then economic health will follow.
Sweet, but not Sugar-Coated Opportunities
Over several years, I've seen major financial news organizations like Bloomberg go from ignoring Africa to featuring it as a key growth market. There's also been a proliferation of exchange-traded funds linked to Africa broadly and to some countries specifically.
For example, the Market Vectors Africa ETF (NYSE: AFK) taps growth in Nigeria and Morocco with a price-to-earnings ratio of 10. The S&P 500 is currently trading at about 14 times earnings.
AFK isn't doing very well over the past year, showing that all Africa plays aren't created equal. By investing in companies like Attijawarifa Bank (I hadn't heard of it either), that index fund's planners have gone a little too obscure to draw big volume, and that could trap buyers when AFK drops in trading.
Market Vectors also recently launched its Egypt Index ETF (NYSE: EGPT), which amounts to a play on both Africa and the Middle East at the same time.
The winner among Africa ETFs and pure-play stocks remains the iShares MCSI South Africa Index (NYSE: EZA). Though nearly 1/4 of the working-age South African population is jobless, investors have reaped 96% gains in EZA since last March. That beats the S&P, and what might surprise you is that South Africa's iShares has outpaced its Hong Kong counterpart (NYSE: EWH). That China-oriented ETF has climbed by 78% dating back to this time in 2009.
Nevertheless, Africa is vulnerable. Commodities drive index funds like EZA, which means that major drops in gold, oil, or copper can hit national markets and government coffers hard. Hundreds of people have been killed in ethnic rioting in Nigeria in recent days, and similar violence came after a disputed election in Kenya in late 2007.
For a balanced, pan-African economy to take its place next to the Asian Tigers and other emerging markets in the Southern Hemisphere, hard assets and international aid can't be the only sources of big revenue. The United Nations says agricultural business is critical to Africa's success, and Kenya is making major moves in renewable energy that could draw millions more dollars for local development.
To sum up: Africa has problems as well as potential. If fear is the main emotion driving your investment choices, you will miss big returns in favor of prevailing wisdom that carries its own huge risks.
Africa's risk outlook is changing by the year — and largely for the better. Make it a part of your portfolio today with some of the options I've mentioned here.
And in April I'll be updating you with more up-to-date news and plays from Africa itself, where I'll be attending the Agisson Vert Green Business conference in Morocco.
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