North, South, or In Between?
Investing in Africa varies quite a bit by region. Northern Africa is much the same as much of the Middle East in terms of its oil assets and major industries. South Africa is thought to be a more developed market with its strong mining industry. Sub-Saharan Africa is still not very open to international investors. It includes lesser developed economies. South Africa is the most popular place to invest in this part of the world. It’s driven by raw materials and mining to a great extent. It is the largest producer of gold, platinum, and chromium in the world, but its agricultural and banking sectors are also fairly large. Its consumer class is slowly easing reliance on exports, thus fueling domestic services growth. Northern Africa consists of Algeria, Egypt, Libya, Mauritania, Morocco, Tunisia, and the Western Sahara region. Many of these countries are known for their crude oil reserves. Libya holds Africa’s largest oil reserves, the ninth largest in the world.
ETFs and Mutual Funds
One way to invest in these nations is through exchange-traded funds (ETFs) and mutual funds. Not only are these funds traded on U.S. stock exchanges, but they also contain built-in diversification. They cost far less than building a portfolio with American Depository Receipts (ADRs), which are foreign stocks that trade on foreign stock exchanges. There are only a few broad options to invest in the region, because the rest of Africa isn’t quite as popular. The first option is to purchase Middle Eastern and Frontier Market ETFs that include exposure to these countries. Many of them have very extensive natural resources, so the second option is to invest in commodity ETFs, like those focused on copper and gold. Among the most popular ETFs to invest in Africa is VanEck Vectors Africa Index ETF (AFK).
Pros of African Investments
Africa offers the highest return on foreign direct investment in the world, according to the Overseas Private Investment Corporation (OPIC) and UNCTAD. There are also a few risks if you decide to invest there. Companies face a number of hurdles, from civil wars to political risk, as they compete in the region’s healthy economies.
Natural Resources
These nations have a great number of natural resources, ranging from oil and diamonds to gold and uranium. Many of them remain untapped, due to a low human density, along with a lack of infrastructure and financing.
Large Population
Africa’s population accounts for about 17% of the world with nearly 1.4 billion people living in more than 60 territories as of 2021. It creates a huge market for consumer services, such as telecommunications and banking.
Lack of Development
These nations remain a bit undeveloped with per capita income that lags behind the rest of the world. There may be a huge chance for growth in the future as its population grows and becomes wealthier.
Cons of Investing in Africa
Some governments in this region are known for their corruption or lack of policy, which can lead to a number of problems, ranging from extortion to nationalizations. The lack of policy can make it complex to do business there.
Lack of Infrastructure
Africa has a low human density and per capita income. This adds to its lack of infrastructure. It makes it hard for companies to get electricity, roadways, and other needed components to operate in some areas.
Regional Conflicts
Africa is well known for its civil wars and conflicts, which have taken a toll on its population. Regime change can also be very hard for companies, because it causes a great amount of uncertainty.
The Bottom Line
You should weigh the benefits and risks of investing in Africa with great care before taking any positions. It’s often a good idea to allocate only a small portion of assets to risky regions like this, to maximize risk-adjusted returns. The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk, including the possible loss of principal.
