Despite the turmoil and political unrest, more investors are looking to Africa as the new frontier market.
A frontier market is a market which hasn’t yet reached emerging market condition. Investing in Africa would certainly fit along the guidelines of a frontier market investment.
ETFs for Investing in Africa
There are only a handful of exchange-traded funds available for investors ready to consider investing in Africa. One of the most popular is the Market Vectors Africa Index ETF (AFK). South Africa, Nigeria, and Egypt earn the overwhelming majority of this fund’s investment interest. The ETF generates a yield of 1.32%, which easily covers the .78% annual expense fee.
The PowerShares MENA Frontier Countries Portfolio (PMNA) is another investment option for investing in Africa, as well as other frontier countries. The ETF is more closely aligned with Middle Eastern funds, which makes it riskier in terms of political stability and connections to commodity prices. The 3.82% annual yield, however, makes it very attractive, and also shows how connected this ETF is to the oil industry. Oil is a key commodity to many frontier markets, and oil companies have always paid some of the best dividends.
Think Twice before Investing in Africa
Investing in Africa requires that you have a very strong stomach to handle the volatility and potential that your investment will eventually go to zero. The political instability is especially problematic for African investments, since corrupt governments can effectively shut down major firms with the stroke of a pen. Likewise, frequent war between governments and their people cause constant uncertainty about the future. The only thing that is certain is uncertainty.
However, if the frontier markets of today become the new emerging markets of the future, investors will naturally benefit to the tune of multi-bagger upsides. Investing in Africa in means that you’re embracing all the risks of a frontier economy, but the upside is potentially enormous. Risk only a small portion of your investment capital in frontier nations to allow yourself a large upside without huge risks to retirement plans.
For those with only a few years left to retirement, African investments are certainly untouchable. The volatility and uncertainty is something that should be played only with a long-term investment horizon long enough to temper the frequent ups and downs.
South Africa is Surest Bet
Among all frontier markets, South Africa is the most stable. In 2010, China and other BRIC nations invited the country to join what is becoming a very important economic union. South Africa is a hotbed for commodities, especially oil and minerals, making it a great addition to Brazil, Russia, and India for inter-BRIC international trade.
China is currently South Africa’s largest trading partner, even though geographic distance makes the two unlikely pairs. However, the northern neighbors to South Africa are currently underdeveloped, lacking in economic progress, and in much need of political and economic stability before becoming major trading partners. Investors should keep in mind the economic link between Africa and China, as any slowdown in Chinese growth could adversely affect development in the South African economy.