Africa is seen as the "final frontier" by many international investors. With a population of about a billion and significant natural resources, investment in Africa has been growing in popularity over the decades. But the region has also been devastated by war and regime changes that have kept many multinational companies out.
Invest in Africa: North, South or In-Between?
Unlike Europe of Latin America, investing in Africa varies quite a bit by region. Northern Africa is very similar to much of the Middle East in terms of its oil assets and major attractions, while South Africa is considered a very established market with strong diamond reserves. But in-between Sub-Saharan Africa is still widely unavailable to the public markets.
South Africa represents the most popular way to invest in Africa. Driven largely by raw materials and mining, the country is the largest producer of gold, platinum and chromium in the world. However, the country's agricultural and banking sectors are also fairly sizable, while even its consumer class is gaining some clout in the investment community.
Northern Africa consists of Algeria, Egypt, Libya, Mauritania, Morocco, Tunisia, and Western Sahara. Many of these countries are known for their extensive crude oil reserves. For instance, Libya holds Africa's largest oil reserves and the eighth largest reserves in the world. In fact, about 11% of all E.U. oil came from Libya in 2010.
Easily Invest in Africa with ETFs and Mutual Funds
The easiest way to invest in Africa is through exchange-traded funds (ETFs) and mutual funds. Not only are these funds traded on U.S. stock exchanges, they also contain built-in diversification and cost far less than manually building a portfolio.
The most popular South African ETF is the MSCI South Africa Index Fund (NYSE: EZA), which represents the only pure play to invest in the country. However, the SPDR S&P Middle East & Africa ETF (NYSE: GAF) also has more than 80% exposure to the country, which makes it a more diversified play on the country and region.
Since the rest of Africa isn't quite as popular, there are only a few broad options to invest in the region. The first option is to purchase Middle Eastern and Frontier Market ETFs that include exposure to African countries. Since many African countries have enormous natural resources, the second option is to invest in commodity ETFs, like those focused on copper and gold.
The most popular ETFs to invest in Africa include:
- Market Vectors Africa Index ETF (NYSE: AFK)
- SPDR S&P Middle East & Africa ETF (NYSE: GAF)
- MENA Frontier Countries Portfolio (NYSE: PMNA)
- Middle East Dividend ETF (NYSE: GULF)
- Fontier Markets ETF (NYSE: FRN)
Invest in Africa: The Benefits & Risks
Africa offers the highest return on foreign direct investment in the world, according to the Overseas Private Investment Corporation (OPIC) and UNCTAD. But there are also many risks faced by those that invest in Africa. From civil wars to nationalization, companies face a number of hurdles competing in the region's promising economies.
Benefits of investing in Africa include:
- Natural Resources. Africa has an enormous amount of natural resources, ranging from oil and diamonds to gold and uranium. And many of these natural resources remain untapped due to a low human density along with a lack of infrastructure and financing.
- Large Population. Africa's population represents approximately 14.72% of the world's total population with about a billion inhabitants in more than 60 territories. This creates a huge opportunity for consumer goods, such as telecommunications and banking.
- Relatively Undeveloped. Africa remains relatively undeveloped with per capita income averaging just $1,800 in 2000 compared to $8,800 in the rest of the world. This means that there may be enormous opportunity for growth in the future.
Risks of investing in Africa include:
- Governmental Problems. Some governments in Africa are known for their corruption or lack of policy. Corruption can lead to a number of problems, ranging from extortion to nationalizations, while the lack of policy can make it complicated to do business.
- Lack of Infrastructure. Africa has a low human density and per capita income, which contributes to its lack of infrastructure. This makes it difficult for companies to get the electricity, roadways and other necessary 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 changes can also be very difficult for companies, since it causes a great amount of uncertainty.