Investing in Africa2011 Mar 24
Investing in Africa even sounds a little extreme. But investing in Africa not only sound extremely - it is like this in fact. If we would distinguish developed and emerging markets, then most of the Africa’s countries should be appointed to none of these, but to pre-emerging stage countries.
While there are few Africa countries that are more developed than others, still most countries have not yet reached an expansive economy development phase with booming industry. Maybe those counties will skip this phase going straight to service sector development, but that’s very unlikely and sounds more than utopia.
At the current moment economies of Africa countries are mostly dependable on resources exploitation. A lot of commodities are exported from Africa to more developed countries. So investing in Africa’s stocks would be dependable on commodity prices. Also some significant part may have financial and telecommunication sectors, which may have bright prospects over very long period.
Another important reason for investing in Africa is lower correlation compared to other markets. We have to face a fact that all financial markets correlates now, but still some low developed Africa countries live their own life and correlate less with global financial markets. And if you will invest in Africa not all your money, but only a smart proportion of your portfolio (not more than 20%), then Africa investments should not look so extremely risky.
Investing Risks in Africa
However, risks should be not forgotten when investing in Africa. Of course, risks shouldn't be forgotten anytime at investing process, but even if Africa investing includes all regular stock investing risks: market risk, sector risk, companies risk, economical risk (including currency and other risks of financial markets), there is one major risk of early stage emerging markets - political risk.
Political risk may occur particularly rarely, but the consequences of it can be overwhelming. Populations of undeveloped countries are evolving, and major changes are inevitable once in several decades.
Last events (2011 May) in Africa’s Arabic countries are exactly manifestation of political risk. It’s not yet the end of these events, but it looks that the worst case scenario will be avoided. The worst case for the investor would be nationalization of all the assets for a symbolic price or no compensation at all.
ETFs for Investing in Africa
The most suitable investing in Africa stocks would be an Africa ETF. Then you would avoid unsystematic risks, also lower securities acquisition costs. These are few most known Africa ETFs that invests in equity:
Rokas Lukosius - investing book author
* Disclaimer: an author of the article might have been invested in stocks/assets that are mentioned on the article directly or indirectly.
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