Tuesday, July 27, 2010

For Serious Investors: It's Time for Africa

In this era of global uncertainty, investors are wary of investing in alien markets. A lack of fundamental analysis of the potential good upcoming markets also acts as a deterrent for investors. Some markets follow the global patterns and some just swing with an entirely different wavelength. One such market that historically has never followed the global market and its patterns is the African continent. The African people and more importantly the African markets have their own dynamic life and irrespective of current trading volumes, liquidity or fundamentals, African markets have mostly walked without much global baggage. Considering the fact that most African regions are bracing themselves to kick-start their economic progress, a long-term growth potential is the best possible way to look at the African markets.

Gone are the days when Africa was considered to be a poor continent rich only in natural resources but where poor people fought for survival amid disease and poverty. Africa, the birthplace of human civilization, is slowly but surely getting its rightful place in the history of mankind. African countries are not simply spectators to the economic rise of China and India but are a party to it. Africa is not only attracting investors from China and India, but African ETFs have also shown substantial gains in the recent times. There is no doubt that some African nations offer a tremendous growth opportunity for the investors, especially for those looking at emerging economies outside the BRIC nations. Of course there are people who are skeptical of the kind of growth African nations can achieve, but as South Africa showed with the successful completion of the FIFA World Cup Football 2010, the continent is ready to attain its lost glory.

The largest economy in Africa is the Republic of South Africa with a 77% total market cap of the MSCI EFM Africa index components. Egypt, Nigeria and Morocco make up 5%-10% each, and smaller investments include Kenya, Mauritius and Tunisia. Together, the African Nations make up 10% of the world’s emerging markets market cap. According to a recent International Monetary Fund report, at least eight African countries were headed toward emerging market status when benchmarked against the founding members of the Association of Southeast Asian Nations, which were among the early emerging markets. The criteria of growth, private sector-led growth, and investable markets were met in Botswana, Ghana, Kenya, Mozambique, Nigeria, Tanzania, Uganda and Zambia. The International Monetary Fund (IMF) has further projected that sub-Saharan Africa’s economy will expand 4.7% this year, double 2009’s rate. Commodity exporting countries are likely to lead the growth.

Investing in Africa

Investing in Africa is high risk for many reasons, including currency fluctuations, poorly developed markets and political risk. Yes, there are still some unstable countries, but the number of African democracies has jumped from just four in 1990 to 17 today. At the same time, many countries have begun liberalizing their economies and developing their capital markets. Not just Ghana and Egypt, but African markets overall have easily outperformed the world averages last year and over the past three years. Moreover, the number of stock exchanges has jumped from ten to 18 in the past decade. The International business community and most multi-national corporations operating businesses in Africa have been reaping significant dividends from their investments and in many cases the rates of return have been higher than from those in other regions. Another very good reason to look to Africa is that investment, rather than charity, is more likely to lift Africa out of its troubles and poverty in the long-term.

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