Investing in Africa

Brian Hicks

Updated February 9, 2009

"Stock exchanges are like airlines—every head of state wants one."

At least that’s what one senior African banker told the Financial Times this week. And it’s true that launching a stock exchange is real landmark for developing economies.

But steering the market away from disaster is a much greater, and more permanent task.

Across Africa, the number of stock exchanges has quadrupled since 1992, giving investors more access than ever to equity in these so-called "frontier markets."

With the exception of South Africa, though, the world’s poorest continent is still something like the edge of the investment universe.

It may be a good thing to be on the edge these days, since Wall Street has turned into a vortex of uncertainty and risk.

Anglo-Saxon Brand "Debunked"

Economist Nouriel Roubini says that the "Anglo-Saxon" system of financial system regulation has collapsed.

With the revelation of the Madoff Ponzi scheme, ratings agencies that had vested interests in the products they were appraising, and other market shenanigans, the dominant framework for growing wealth in advanced capital markets is now in doubt.

Roubini doesn’t think the market economy’s day is done, but "the specific brand of Anglo-Saxon, laissez faire, wild-west, free market fundamentalism without prudential supervision and regulation of financial systems has been debunked," he says.

The notion of quality is also up in the air. Some say your point of retreat should be U.S. Treasuries (that market now seems to be a bubble), and for others it’s gold or the dollar.

Perhaps the best long-term approach is to think about the view from the poorest countries in the world.

As they watch the richest nations convulse with banking debacles and skyrocketing unemployment, African markets have the potential to learn from our mistakes, and deliver superior returns to those who know how to tap local markets.

South Africa Outperforms and Expands

Right now, international investors who have taken a stake in the South African market are far ahead of the global mainstream.

In the past 3 months, the iShares MSCI South Africa Index ETF (NYSE:EZA) has enjoyed a climb of more than 11%, vs. the S&P 500’s 7% slump.

EZA is heavy on gold and platinum, with AngloGold Ashanti, Impala Platinum, and Anglo Platinum among the ETF’s top holdings.

Yet the rest of Africa has not been able to harness resource wealth into capital liquidity and real market returns through company listings.

So the heads of the Johannesburg Stock Exchange, which holds more than 90% of the whole continent’s market cap, are kicking off a campaign to bring more liquidity to Africa while diversifying away from South African dominance and volatile raw materials.

The JSE is bringing companies from all over Africa to its Africa Board, a secondary exchange where non-South African companies can gain more foreign exposure and capital access.

Like the London Stock Exchange’s AIM junior exchange, or Canada’s TSX-Venture in Vancouver, the Africa Board will be an important intermediate stop for African companies moving into the global mainstream.

It won’t be easy…

Risk and Reward in Pan-African Investing

Corruption is rampant in Africa, from customs inspection stations to mining permit offices, all the way to voting booths.

Failed states or countries on the brink dot the physical and financial landscape… Zimbabwe, for example, has a stock exchange, but try to think how you would establish a share’s value when the government knocks 12 zeroes off the dollar in one day (yes, they did that on February 2).

You have to start somewhere, though…

Trustco, a financial services firm in South Africa’s neighbor Namibia, will be the first on the Africa Board, and planners are already reaching up farther north into Nigeria and Cote d’Ivoire for new listings.

Now, South Africa is a former British colony, and as such we can expect its market to fit at least somewhat within the Anglo-Saxon paradigm.

But Johannesburg is a world away from London. And with the whole globe rethinking what risk means, this may be the best time for African markets to establish their own momentum and separate themselves from the floundering Anglo-Saxon brand.

We’ll be watching developments in the Pan-African stock exchange system carefully.

For now, though, EZA is a good addition to any diversified international stock portfolio.


Sam Hopkins

P.S. – For all the changes taking place in Africa’s investment scene, energy will continue to be a pressing, and profitable, issue for investors who want to own a stake in the continent’s future. Green Chip International is up on the newest energy efforts from Algeria to Angola, and we already hold stocks that have projects running in Africa. You may be especially interested to learn about the new green links between China and Africa. To learn more, check out GCI today:

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