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Deeper into West Africa: Investing in Ghana

By: Peter Kohli
Posted: 7/8/2014 11:27:00 AM
Referenced Stocks: ABGB;GFI;GDXJ

Ghana is West Africa's second-biggest economy after Nigeria. Ghana’s economy is projected to grow 8.7% in 2014, well above the average annual growth rate of 6.5% for the period since 2000.

The economy of Ghana is much more diversified than that of Nigeria. Oil only recently displaced cocoa as Ghana's second-most valuable export in 2012, according to the Bank of Ghana. Gold remains the country's top foreign-currency earner. In addition, the country has diamonds and timber.

With a population of 25 million, Ghana also has a thriving middle class, very competitive labor costs and an open attitude toward foreign business ownership; Ghana allows 100% foreign ownership.

The main challenge in Ghana is building infrastructure, particularly in the areas of water and power supply. About four million of Ghana's population live around Accra, Ghana’s capital city. Accra has seen numerous cholera outbreaks due to the lack of clean water. According to the World Bank, Ghana currently spends about $1.2 billion per year on infrastructure, the equivalent of about 7.5% of its GDP. Inefficiencies — notably the under-pricing of power — result in the loss of an additional $1.1 billion annually. According to the World Bank, addressing Ghana's infrastructure challenges will require raising annual expenditures to $2.3 billion.

Construction of the first large desalination plant in West Africa is underway in Ghana. Partners in the $125 million project include Sojitz Corporation (TYO: 2768), Japan's largest importer of rare-earth metals, and Abengoa S. A. (ABGB), the Spanish multinational corporation.

Demand for power is growing at a rate of 10%-15% a year, but the lack of reliable generating capacity has acted as a brake on the economy; power shortages are estimated to have cost almost 2% of Ghana’s GDP. While much of Ghana's electricity is hydroelectric, this source is vulnerable to drought, which leaves the country increasingly reliant on expensive oil generation. Fortunately, Blue Energy, one of the UK’s leading investors and developers of renewable energy infrastructure, is building Africa's largest solar photovoltaic power plant in Ghana.

While there aren’t many entry points for individual investors, it is possible to get decent exposure to Ghana. As I mentioned in my recent article about Nigeria, until recently investors required Nigerian and Ghanaian brokerage accounts to access the stocks. Now, thanks to Imara S.P. Reid, retail investors can invest in any stock market in Africa without having to use multiple brokers. With that in mind, the Ghana Stock Exchange Composite Index (GGSECI) seems more accessible.

The Ghanaian Stock Exchange, launched in 1991, has 37 companies listed with a total market capitalization of more than $3.5 billion. Last year Absa Capital’s NewGold Exchange Traded Fund (JSE: GLD), the country’s first ETF, was launched on the exchange. NewGold is already listed in South Africa, Nigeria and Botswana. One point of entry for developing markets investors is companies doing a substantial amount of business in a particular country. For instance, Gold Fields Limited (GFI) is the premier gold mining company and largest gold producer in Ghana.

When it comes to funds, be sure to read the data on country weighting. The largest concentration of Ghanaian exposure is in Van Eck’s Market Vectors Junior Gold Miners ETF (GDXJ), which has 2.93% exposure; the Nile Pan Africa Fund (NAFAX), with1.12% exposure; and the Wasatch Frontier Emerging Small Countries Fund (WAFMX), with 2.1% exposure. Funds with minor Ghanaian market exposure are the Templeton Frontier Markets Fund (TFMAX), the Harding Loevner Frontier Emerging Markets Portfolio (HLMOX), and the T. Rowe Price Africa & Middle East Fund (TRAMX).

Peter Kohli | 484.671.3011

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