Africa: Untapped Potential

Investing is Africa has long seemed like a promising, if perilous, bet. But its potential always fizzled, due to its wars, political instability and corruption. Now, though, we may be on the verge of when it makes sense to try out the continent, with a landmass three times the size of the U.S., albeit in a cautious way.

Last year's Ebola epidemic in West Africa and ongoing terrorism in Nigeria dominate headlines - and overshadow the economic prospects of the globe's second-largest continent and its more than one billion people. Business leaders in developed economies consistently express strong interest in African assets. Foreign investments hit a record $80 billion in 2014, with emerging market countries continuing to show a strong interest in African assets.

Investors from the U.S., the United Kingdom and France hold the biggest share of African investments: $178 billion in 2012, the latest data available. Chinese investors held nearly $28 billion in assets, a trend likely to continue as Chinese labor gets more expensive for manufacturers; investors from Brazil, Russia, India and South Africa also hold large portions of the foreign-investment total.

While the majority of investments flow to six African nations that represent a third of the continent's population, over time the additional 48 countries may also see additional investments. The two largest destinations for investors are South Africa and Nigeria, which have the two largest economies. (Nigeria just completed a peaceful election that with luck will help combat the threat of the militant Islamic group Boko Haram .)

The good news: Although a lot of the investments so far focused on the resource-rich African states, a recent report from the African Development Bank , the United Nations Development Programme and the Organisation of the Economic Co-operation and Development noted that more manufacturing and service projects will appear in more of the continent.

Manufacturing jobs in Africa come from China, of all places. Just as countries such as China were the low-cost producers for many large international conglomerates in the 1980s, more once-emerging nations are exploring setting up shop in Africa. The stubborn global recession prompts many manufacturers to look for even lower cost producers; Ethiopia, Kenya, Rwanda and Tanzania are all trying to attract these jobs.

These countries must of course deal with the same issues that other emerging-market nations dealt with 30 years ago: training the workforce, establishing reliable energy supplies and upgrading necessary infrastructure to transport manufactured goods.

The International Monetary Fund predicts the sub-Saharan growth - that is, in 29 African nations south of the Sahara Desert - will be 5.8% this year. (One challenge of gathering such information: getting reliable data about the economic activity in these countries, as past methods to capture the gross domestic products widely under-reported growth.)

Last year, Nigeria became the continent's largest economy after an economic reevaluation - done for the first time since 1990 - called "rebasing." In one sign of progress in the past quarter century, Nigeria evolved from having almost no residents with cell phones to one of the largest cell-user populations in the world.

For now, the only two African countries in the emerging-markets fund that our firm uses are Egypt and South Africa; several other African countries are also frontier markets of the developing world, pre-emerging markets where political instability and spotty regulation can make a rough playing field for investors.

Africa-specific exchange-traded funds (ETFs) include the iShares MSCI South Africa ETF ( EZA ), the Global X Nigeria Index ETF ( NGE ) and the Market Vectors Egypt Index EFT ( EGPT ) and Africa Index ETF ( AFK ). The latter is currently the only fund covering the entire continent. Warning: At this stage, these investments are very risky, and you might want to wait before getting in now.

Obviously Africa's investment environment remains new and risky. Though I am reluctant to recommend funds in specific countries - most of which are still frontier nations, at best - I do want to point out future opportunities.

Several more African countries will likely move into the emerging markets soon. As citizens of this enormous land participate more in a global workforce, their standard of living will rise along with their consumption of goods and services from both local companies and multinationals.

The long-term investing outlook is bright for Africa.

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Dan Crimminsis the co-founder of Crimmins Wealth Management LLC in Woodcliff Lake, N.J. His blog is Roots of Wealth.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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