I recently decided to invest in the stock market in Africa. I worked and lived on the continent for 7 years, before becoming a full time investor, so I feel that I have a better-than-average understanding of the potential of investing on the continent.
I’ll start with five reasons why I decided to invest there, I’ll then mention some of the key risks, and will close off by mentioning how I invested in the stock market in Africa.
Reason 1: Demographics
Need I say more than this graph?
Africa’s projected growth is beyond comprehension. The numbers are absolutely staggering. What better way to hedge against ageing countries in the West and East Asia than by getting an early position in this growth story?
Reason 2: Massive amounts of natural resources
Africa is jam-packed with natural resources.
Contrary to popular belief, mining in Africa is great. Personally, I prefer investing in mining in a number of African jurisdictions than in the increasingly anti-mining West and in periodically communist Latin American countries. Granted, there is significant political risk, but it is often overestimated, whilst other jurisdictions’ political risk is underestimated.
Also, where are the Chinese going to get their natural resources from? Natural resources in rich countries such as the US, Canada, and Australia are increasingly off-limits from an investment point of view for them. Russia will gladly sell natural resources to China, but will always seek to retain control, whilst many African countries will gladly let the Chinese invest in, and develop mines in their countries. Expect more Chinese investment into Africa, and a plethora of Chinese acquisitions.
Reason 3 for investing in the stock market in Africa: An infrastructure boom
Highways, bridges, ports, and train tracks are being built all over the continent. This here represents Chinese plans for new railways across the continent. It excludes many of the existing railway lines that have already been built by them.
It’s easy to hate on China. Mass media and Western governments push us to hate China. At the end of the day though, while Western aid agencies build random wells (for which they pay substantially overpriced bills sent by contractors) and dish out gender studies classes in villages, the Chinese build what matters. They build infrastructure, hospitals, affordable housing, etc.
Granted, the quality is not always top notch, and why should it be at these prices? Nevertheless, this infrastructure drive is what these countries need to support their long term growth plans.
Reason 4: Education standards are improving in many countries
Apart from a few grossly mismanaged countries such as Zimbabwe and South Africa, education standards have been improving throughout the continent. We can use literacy rates as a proxy.
Apart from a few countries such as South Africa and Zimbabwe, education standards are generally improving across the continent. This has a huge impact on productivity and vastly increases the potential capacity of the economies.
Also, internet data prices are plunging across the continent. This is a great source of equalization with regards to access to education and knowledge. Drive around Accra, Abidjan, or Nairobi as night, almost every security guard can be seen on his Chinese smartphone reading or watching videos.
I can see it with my own content. When I recently published videos on real estate and the stock-market in Kenya, I had a wide array of Kenyans, across social and economic classes, get in touch with me to ask me questions. Just five years back, when data was still expensive, this would not have been the case.
Like it or not, believe it or not, Africa is moving forward. It won’t be a smooth ride, and all the naysayers will be glad to point out the many and inevitable setbacks, but the path forward is clear.
Reason 5 for investing in the stock market in Africa: Valuations have taken a beating
The NSE20 index (Kenya) is quite exemplary of what has happened to most African stock markets.
Most African markets took a serious hit after the previous oil and commodities bull-run ended, and as the Fed started tapering. Since then, valuations have remained depressed, but have recently started to break out.
I can therefore invest in solid market-leading companies, dishing out double-digit dividend yields, with almost zero debt on their balance sheets, and substantial growth prospects. What’s not to like? It’s the ultimate contrarian investment, with a number of catalysts.
What are some of the Caveats?
There are many:
- I’m excluding South Africa from this analysis as it is “developed” from a capital markets point of view, and I have zero confidence in its prospects. I wrote an article on this very topic last year, which has gone viral in South Africa.
- I’m also excluding North Africa as many of its dynamics are more closely related to Middle Eastern dynamics, though there is an interesting case to be made for Egypt which I documented here.
- It’s important to be diversified across jurisdictions as something will always be going wrong somewhere.
- When I say “Africa” I am over-generalizing. The reality is that it is an extremely diverse continent, in many ways more diverse than Europe. Some countries are completely uninvestable.
- Countries that I find very investable: Kenya, Tanzania, Namibia, Ghana, Ivory Coast, Senegal, Madagascar, Mauritius, Uganda, Rwanda.
- Countries that are investable but where one must proceed with extreme care, especially from a macro point of view: Mozambique, Nigeria, Zambia, Ethiopia, Botswana, Angola, DRC, and the Sahel (but only for speculative mining). Most other countries, I would stay away from as the risk reward ratio doesn’t make sense.
- Economic crises, political turmoil, ethnic violence, capital controls, IMF bailouts, wars, terrorism, devaluations are all part of the everyday landscape. By investing on the continent, you WILL have some of your investment go awry. Fact. If you cannot accept this sort of volatility, then do yourself a favour and stay away.
- Low liquidity of stocks. Many stocks are hard to buy, but it also means that once money starts flowing in the re-rating can be explosive.
How did I invest in African stock markets
I bought into a fund. Generally, I do not like funds, but in this particular case it made sense:
- The fees aren’t extraordinarily high (1.5% and 15%)
- I do not have the time to monitor 10 different local stock markets to look for opportunities. I simply let the fund manager take care of it, and I know that whatever stake I buy in the fund is very well diversified across the continent.
- Africa ETFs in Western markets do not have exposure to these smaller, local stock markets. And buying into the small stock markets is the play here – not buying into South Africa or the shares of Western-listed companies with high exposure to Africa. These typically trade at much higher valuations.
- The fund manager, an Australian, lives in Tanzania. He isn’t just some suit working in an office in London or NYC. He has local insight.
- Larger funds such as his can negotiate and buy whole blocks in companies, which retail investors cannot. This allows him to buy into companies that I, on my own, would not be able to. He can then flip these shares to other institutional investors later on, or create liquidity in the market.
The fund I invested in is called the African Lions Fund. I really encourage you to sign up to the fund manager’s free newsletter, in which he describes the investment opportunities he sees as he travels around the continent. You can sign up here.
I also made this video on why I decided to invest in the stock market in Africa
Other articles on Africa:
- Making a Real Estate Investment in Kenya, a smart move?
- Cheap, Chinese-built Real Estate in Nairobi, Kenya – A Good Investment?
- Has the Stock Market in Kenya bottomed?
- 9 Reasons why the economy in South Africa is on the verge of a crash
If you want to discuss your internationalization and diversification plans, book a consulting session* or send me an email.
*a consulting session is a discussion about your portfolio and objectives. It does not constitute legal, financial, tax or investment advice.