Nothing was a hotter investment over the past 10 years than Emerging Markets.  The MSCI Emerging Markets Index returned 7.29% from 1999 to 2009 whereas the S&P and Dow Jones Index both posted negative returns over that same time period. 

When people think of Emerging Markets, "The Big Four" usually come to mind: China, India, Brazil, and Russia.  There has been so much investment in those four countries over the past 10 years that it is hard to still call them emerging markets.  In fact, China's economy has grown so much so fast that it recently passed Japan as the second largest economy in the world.  Wow!

 

So why invest in Africa?

One of the few regions still untapped with respect to investment potential is Africa.  Investment potential and Africa usually don't go together and when most people think of Africa, they think of political instability and poverty.  Those two large, serious issues usually do not mesh with investment potential. 

 

Nevertheless, there are a couple of compelling reasons why Africa may be a great investment opportunity worthy of consideration.  The reasons include:

·          Growth Potential - 9 of the top 15 fastest growing economies are in Africa.  There are more than 100 companies with revenues greater than $1 billion per year.  Africa holds an estimated 30% of the world's mineral reserves.  As the BRIC countries industrialize, their demand for natural resources will keep increasing.  China alone has increased its trade with Africa from $10 billion in 2000 to $90 billion in 2009.  Wal-Mart recently bid $6 billion to buy South Africa's Massmart.  The move would give them a presence in Africa and advance their emerging markets strategy. http://www.reuters.com/article/idUSTRE68Q0RA20100927

 ·          Value - Most African markets are attractively valued.  The Price/Earnings ratios for most of  the frontier economies is a lowly 6% which is several points less than developed countries and other emerging markets.

·          Low Correlation - Investors are constantly looking at ways to include investments with low correlations to each other.  That way when one asset class declines the other ones can pick up the slack and keep the portfolio moving upward.  Only a few of Africa's stock markets or public companies are included in popular emerging market indexes or index funds.

·          Other Benefits - African companies also benefit from doing business in a region where there is cheap labor, a fast growing population, rising commodity prices, and improving levels of political stability and transparency. The fiscal balances are good with low debt and budget deficits compared to the developed world.

 

How to invest in Africa?

·          Russell Frontier ETF - The Russell Frontier Index offers broad coverage of African countries, including Nigeria, Kenya, Mauritius, Tunisia, Togo, Senegal, Botswana, Ghana, Namibia, Gabon, Tanzania and Zambia. Africa is considered by many frontier managers to be a key market that has, until now, been under-represented by existing frontier indexes.  There are no ETF's yet that mirror this index, although there should be some created shortly

·          Market Vectors African Index ETF (Symbol: AFK) - An ETF that invests in companies from Egypt, Morroco, Nigeria, and South Africa.

·          Nile Pan-African Fund (Symbol: NAFCX) - A fund managed by the Nile Capital Management Group which is based out of NYC.  The fund expects to invest at least 80% of its assets in stocks of public companies that have the majority of their assets in Africa, and/or derive a majority of their revenues from Africa.  This analysis evaluates and ranks each of Africa's 53 nations on the basis of economic growth, inflation, interest rates, currency, regulatory framework and political ability.

·          US Companies doing business in Africa - Another option is to invest in companies who are doing business in Africa.

There are a lot of compelling reasons to invest in Africa, but it is imperative to be cautious.  Africa, along with other emerging markets, may experience volatility, currency fluctuations, and high inflation rates.