Did you miss out on China's unprecedented growth?
In the past decade and a half, China has sailed past Germany,
France, Great Britain and Japan before settling in as the world's
second-largesteconomy behind the United States.
If you missed out on that growth, were youput off
frominvesting while many experts dithered about the reliability
of official Chinese government data?
It would have been nearly impossible for an individual
investor to get in on China in 1998. The
Xinhua China 25Index (
made its debut in 2004 as the first Chineseexchange-traded fund
(ETF) , but it has had considerabledownsides , including its fees
and a high concentration in the financial space.
As aproxy for investing in China since 2009, consider the
SPDR S&P ChinaETF (
, which has a more balanced portfolio than FXI.
But there's another opportunity in a differentmarket that is
in the early stages of tremendous growth. This market isn't a
single country, however. I'm talking about 54 countries -- the
continent of Africa.
Could Africa really be the next China? According to some
experts, it's a real possibility.
"Based on discussions I've had with business leaders and my
own research, I would say that the continent of Africa is about
where China was 15 years ago on the development andinvestment
scale," said Oliver Pursche, president of Gary Goldberg Financial
Services. (The business leaders Pursche spoke with included Kofi
Annan, the former U.N. secretary general.)
Since my colleague Andy Obermueller talked about two of his
favorite frontier markets on the continent, Nigeria and Kenya,
there have been a few developments in Africa. President Barack
Obama concluded his recent trip to the continent with a pledge of
$7 billion from the U.S. to help bring reliable electricity to
70% of Africa's population.
So why shouldn't investors "follow the (U.S.taxpayers ')money
" and benefit?
For starters, the recent military coup in Egypt has certainly
highlighted one of the major concerns about Africa: political
instability. No one said it would be easy.
Obama's appeals aside, there are other signs that "smart
money" is being directed to Africa, namely the wealthiest U.S.
university endowments. Institutions such as Northwestern
University, the University of Texas and Notre Dame have heavily
increased their exposure to Africa. Universities have long
timeframes, and this underscores that Africa is a "buy and hold "
for long-term investors.
China's Big Bet On Africa
Lastyear , China's ambassador to South Africa said that China's
investment in Africa exceeded $40 billion, including $14.7
billion in foreign direct investment.
Last July, China announced $20 billion inloans over the next
three years. And China is not alone. In May, Japan announced a
$32 billion investment in Africa.
Determining exactly how Africawill grow is somewhat like
constructing a mosaic -- and not just because there are 54
countries involved, including seven of the 10 of the world's
fastest-growing economies, according to McKinsey & Co. (Note
that there are different types ofinvestments trade: direct
investment and developmental assistance -- and studies take on
different aspects of these and usemultiple timeframes.)
Getting an accurate picture of Africa is a little reminiscent
of trying to evaluate China. Prudent investors should consider
various inputs and come to their own conclusion.
Positive data from the more credible sources include:
- Last year, foreign direct investment to Africa
increased by 5% to $50 billion, according to the United
- Therate of return on foreign investments in Africa was, in
the first decade of this century, higher than in any other
region, according to McKinsey.
- Africa is now growing faster than Asia, according to the
International MonetaryFund .
According to McKinsey, Africa's collectiveGDP was $1.6
trillion in 2008. While that report only looked at four groups of
industries, it concluded that those could generate as much as a
combined $2.6 trillion inrevenue annually by 2020. This includes
infrastructure, resources, agriculture and consumer-facing
Pursche of Goldberg Financial agrees with McKinsey's
conclusion, saying he sees the two largest investment
opportunities are in infrastructure and energy. He cautions that
neither industry would be easy for individual investors to tap
Interms of U.S. companies that could provide indirect exposure
to this trend,
has signed a deal with the Nigerian government to work together
on infrastructure projects.
Pursche and others said thatfunds were the best way for the
individual investor to get exposure. But there's only one ETF
that provides relatively pure exposure to the continent: the
Market Vectors Africa Index (AFK) ETF.
This fund is heavily invested inshares of companies that are
based in Africa, such as Nigerian Breweries, are listed on
African exchanges or generate at least 50% of theirrevenues from
Africa, such as London's Tullow Oil. Thanks to the situation in
Egypt, along with a general flight from emerging market funds,
AFK is down 9.4% this year and is trading at what many consider a
More daring bargain hunters might consider a single-country
ETF such as
Market Vectors Egypt (
, which is down about 14% this year. This is hardly the first
time turmoil has hit that country and, while Cairo in in the
news, businesses excluding tourism have not faced
Another broad investment to consider is the
Nile Pan Africa (
mutual fund , which is down 5.7% this year. It should be noted
that its top holdings are skewed to Nigerian assets such as
Nigerian treasurybonds , so any adverse news from that country
will affect it disproportionately.
When Africa's infrastructure is shored up -- particularly when
the electricity turned on -- you can expect that the continent's
consumers will accelerate their spending.
Like China, Africa has more than a billion consumers. If
Africa maintains its current growth trajectory, consumers will
buy $1.4 trillion worth of goods and services in 2020, roughly in
line with India's projected spending and more than Russia's
predicted $960 billion, according to the Harvard Business
Anything powered by electricity (read: TV) is likely to be the
first segment to take off, followed by other consumer segments.
is positioning itself toprofit from this, as it has finalized a
deal worth more than $2 billion to acquire 51% of South Africa's
leading retailer, MassMart.
Risks to Consider:
Africa is not a 90-dayturnaround investment. But I wouldn't
be put off by the hand-wringing triggered by the upheaval in
Egypt. I think investors can err on the side of caution while
acting on these foreign investments, which are all but certain
improve infrastructure, raise GDP, and improve thepurchasing
power of millions of consumers.
Action to Take -->
If your long-term portfolio is significantly underweight in
foreignstocks , then you may want to slowly increase your
exposure to Africa in a prudent manner. In 15 years, we could all
be looking for the "next Africa."
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