Africa, the world’s poorest continent, is poised to grow fast in the decades to come. Some countries are finding ways to build more durable democratic institutions that can pave the way towards real development. War, famine and dictators are becoming a little less common. Not everything is shiny: people still struggle to make ends meet they way they do in China and India, but most Africans no longer fear a premature violent death and they can realistically hope their children will do better than them. Actually some numbers look impressive: between 2000 and 2008 secondary school enrollment grew by 48% and over the past decade HIV infections declined by 74% while life expectancy surged 10%. A booming economy has been behind such great development leap. Africa is the world’s highest growth continent. Real income per person has grown by 30% in ten years and GDP growth is expected to average 6% during the next ten years.
Democracies are more flexible political systems than authoritarian regimes. As a result, democracies tend to be less violent and less likely to end up in what is every emerging market investor hell: a messy revolution that brakes the rule of law. For this reason every time I consider Africa as an investment destination, I try to look for those countries that could establish stable democracies. Good examples of this would be countries such as Ghana, Senegal and Kenya. Even Nigeria (which, with its 165 million population, constitutes a huge market) can be considered a good example of African democratic development. The four countries I mentioned above have averaged a 2012 GDP growth of 5.9% and some of them -like Kenya- are real examples of capitalist development. If we are looking forward to invest in Africa we should look for companies operating within this emerging democracies.
The right investment vehicle
Unfortunately is not easy to find ADRs of companies operating exclusively in Africa (excluding some South African Companies). Nevertheless, there are some ETFs that contain some interesting African companies that could help us to benefit from Africa’s growth and development. Let’s review the three available options and see what is the one that fits our objectives best.
The SPDR S&P Emerging Middle Est & Africa ETF (NYSEARCA:GAF) seeks to closely match the returns and characteristics of the total return performance of the S&P Mid East and Africa BMI Index. The ETF has some very compelling companies such as MTN Group Ltd (ADR) (PINK:MTNOY) (which is a a multi-national telecommunications group offering voice and data communications products), Naspers Limited (ADR) (PINK:NPSNY) (which is a multinational group of media and e-commerce platforms) or SANLAM LTD ADR (PINK:SLLDY) (which provides financial solutions to individual and institutional clients). Those and most of the companies that constitute the fund, operate not only in South Africa, but also in the most prominent countries of Sub-Saharan Africa.
The fund is a reasonable way to look some exposure to companies operating in Africa. Besides, its fairly diversified with 10.5% of the fund being Telecom companies, 16.5% companies within the consumer discretionary sector and 7.96% within the consumer staples sector (my favorite one!). This ETF has a gross expense ratio of 0.59%, 3% cash dividend yield (very compelling), 135 holdings and an expected 2013 13.5 P/E. Like most ETF’s it trades at 1times net asset value (NAV).
The iShares MSCI South Africa Index (ETF) (NYSEARCA:EZA) resembles the SPDR S&P Emerging Middle East & Africa ETF despite its “South Africa” name. The reason is that, undoubtedly, South Africa is the most developed country within the region. The iShares fund, with a gross expense ratio of 0.60%, a 2013 19 P/E and 51 holdings is less diversified and more expensive than the ETF built by SPDR. Right now it’s selling at a 1.5% discount to NAV and yields the same dividend and the SPDR ETF.
The Africa IndexETF by Market vectors is the third viable option I found. This ETF has an expensive gross expense ratio of 1.07% and holds 51 different companies. Despite its seemingly low expected 2013 11x P/E I would rather the iShares or SPDR ETFs because the Africa Index ETF is too concentrated in the financial sector (47% of total holdings).
The bottom line
The three options listed above are all viable options but I think SPDR’s ETF is the best option given the quantity of the holdings that the fund has, its valuation, its relatively lower cost and its sector diversification.
The article Investing in High Growth Africa originally appeared on Fool.com and is written by Federico Zaldua.
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