Dark Con­ti­nent

Finweek English Edition - - INVEST DIY -

We all get the at­trac­tion of i nvest­ing i n t he large global economies of North Amer­ica and Western Europe: nice, ma­ture, de­vel­oped economies that can of­fer rel­a­tively sta­ble prof­its and hence re­turns for in­vestors. But what of the other re­gions of the world?

There has been a lot of in­ter­est in in­vest­ing into China, but it is not easy and many worry about the po­lit­i­cal and leg­isla­tive risks in­volved. Added to China is of course the other Brics, although mostly we do South Africa, ig­nor­ing In­dia, Rus­sia and Brazil.

But are we miss­ing a trick right on our doorstep? What about Africa? It con­sists of more than 50 in­di­vid­ual coun­tries (in­clud­ing six is­land states), each with their own rules, cus­toms and pro­cesses, and it is very im­por­tant to view the con­ti­nent as a col­lec­tion of coun­tries rather than as one large re­gion.

But it does of­fer great po­ten­tial re­turns for those pre­pared to look north.

Africa has a to­tal pop­u­la­tion ri­valling that of China and In­dia, and with seven of the 10 fast-grow­ing economies be­ing in Africa, things are hap­pen­ing on the con­ti­nent. Sure, that growth is off a low base, but across the length and breadth of Africa deals are be­ing done, busi­nesses are grow­ing and ex­pand­ing; wealth is be­ing cre­ated - and not only in bank­ing and en­ergy. On the con­ti­nent we have telcos, min­ers, food pro­duc­ers, ce­ment mak­ers and other sec­tors mak­ing great re­turns and of­ten at bet­ter mar­gins than we see lo­cally or in the tra­di­tional North Amer­i­can and Western Euro­pean economies.

Look­ing to the JSE, we do have a num­ber of listed com­pa­nies that gen­er­ate rev­enue and prof­its from the rest of the con­ti­nent, but in almost all cases that rev­enue and profit are at best in the low dou­ble dig­its. Even com­pa­nies such as PPC, which are stak­ing a lot of their fu­ture on Africa, are only look­ing for some 40% prof­its to come from north of our bor­ders.

That leaves us look­ing at the t wo JSE-l i sted ex­change-t raded notes (ETNs).

The f irst is from Deutsche Bank, DBAFRI. It tracks the MSCI Africa Top 50 Capped To­tal Re­turn ETN and cov­ers four African coun­tries: SA, Morocco, Egypt and Nige­ria. The is­sue that I have is that half of the in­dex is made up of JSE-listed com­pa­nies and that de­feats the pur­pose of such an ETN, as we’re likely to al­ready be well ex­posed to JSE stocks.

The sec­ond is is­sued by Stan­dard Bank, its Africa Eq­uity In­dex (SBAEI). It cov­ers 179 stocks across 33 African coun­tries and ex­cludes SA. So it is Africa less SA, which is ex­actly what we want with our ex­ist­ing South African ex­po­sure. Fur­ther, no share can con­sti­tute more than 5% of the in­dex and no coun­try can ex­ceed ei­ther 20% of the In­dex or 15 stocks per coun­try, so nice di­ver­si­fi­ca­tion.

Cur­rently, the three large economies are Nige­ria, Kenya and Egypt, with Morocco close be­hind. Fi­nance and min­ing are t he t wo main sec­tors, mak­ing up almost 75% of the in­dex. This con­cen­tra­tion in min­ing adds risk that both­ers me. Com­mod­ity prices are un­der se­ri­ous pres­sure and I don’t ex­pect any im­prove­ment any­time soon. Sure, as the con­ti­nent grows eco­nom­i­cally we’ll see a lot more con­sumer-fo­cused stocks and this shift will hap­pen fairly quickly, but will it re­place min­ing quickly enough? My worry is that it won’t.

So with one ETN we can get great ex­po­sure to the rest of our con­ti­nent, but we have to de­cide on the com­mod­ity and min­ing risk, and our view on those com­mod­ity prices.

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