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.