How To Invest In Africa: Options To Consider

If you’ve been thinking about expanding your portfolio into emerging and frontier markets, learning how to invest in Africa can be a good option to consider. There are more than 50 countries on the continent of Africa, which provides investors with a myriad of investment options

Why Invest In Africa?

While there is certainly no shortage of investment opportunities available, investing in Africa can be an attractive option for several reasons. Many countries in Africa are rich in natural resources. For instance, Africa contains about 50% of all proven gold reserves and 90% of platinum group reserves, not to mention resources such as oil, iron, cobalt and more.

In general, throughout the countries of Africa, the average age is about 21, which fuels a high demand for goods and services. In many European countries, as well as in the United States and Japan, we have older populations. For instance, in the United States, the average age is about 38 years old, and this older population tends to spend more on health care and entitlements than on goods and services. Essentially, Africa is booming, both population-wise and economy-wise.

Typically, you also will find that African markets and stocks will trade at lower multiples and are less liquid than investments in other emerging markets or in many developed markets. African companies, as well as households, also tend to have low debt levels, which is another attractive feature if you decide to invest in Africa.  

Of course, with investments, the name of the game is making money, and if you want to increase the value of your portfolio and think that an African investment or investments might be a good fit, here are some options on how to invest in Africa.

Emerging Market Investments

As an investor, you have the option to invest in established or developed markets, such as the United States, Japan and the United Kingdom, but you also have the option to invest in less well-established markets and these are classified as either emerging markets or frontier markets based upon several factors.

Throughout Africa, you will find both emerging and frontier markets as well as investments in countries that are not yet classified as frontier markets. Typically, investment risk is lowest with developed market investments and then emerging markets and finally, frontier markets.

This is because these developed markets tend to have stronger currency and more established markets, but even an investment in a developed market can fail, so there is always a risk with any investment. The bonus of investing in an emerging market is that there may be more potential for a higher return on investment than you might have with a developed market investment.

Egypt and South Africa are both listed as emerging markets in Africa by Morgan Stanley Capital International (MSCI) as well as the S&P Global BMI (Broad Market Index). Both of these organizations track available market capitalization in countries around the globe.

Frontier Market Investments

Frontier market investing tends to be riskier than emerging market investing, but, again, with this risk also comes the potential of a greater reward. Certainly, there is no guarantee that any investment will yield positive results, but if you are interested in investing in Africa, there are quite a few frontier markets to consider.

Kenya, Mauritius, Morocco, Nigeria, Tunisia and the West African Economic and Monetary Union (WAEMU) all are classified as MSCI frontier markets. The WAEMU includes several West African nations, including Benin, Burkina Faso, Cote D’Ivoire, Senegal and several more, however, these four nations are included in the MSCI WAEMU Frontier Market Index. S&P additionally includes Botswana, Ghana and Zambia as frontier markets.

The MSCI classifies Botswana and Zimbabwe on its Standalone Market Indexes, and S&P classifies Malawi, Rwanda, Tanzania and Uganda as Standalone Frontier Markets. While many factors go into the decisions MSCI and S&P make on determining a country’s placement on these indexes, essentially, a standalone nation would be seen as a nation slightly below the frontier market.

For African nations on the standalone index, this tends to indicate that the country is poised to move toward frontier market status. In some cases, however, nations can be moved down to standalone status based upon volatility. For instance, Russia, after its invasion of Ukraine was downgraded from an emerging market to a standalone market.

In the case of Russia, classification as a standalone market is not positive, but for African nations, it can indicate that they are poised for expansion, so don’t necessarily count out a standalone nation. Whether you decide to invest in Africa or select any developed, emerging, frontier or standalone market, the most important advice we can provide is to research the investment carefully to determine if this is truly the best investment for your portfolio.

Of course, these aforementioned nations are just a few of the 54 on the African continent, and many African countries are not classified as either frontier or emerging markets, but that doesn’t mean you can’t find profitable investment opportunities in these countries.

How To Invest In Africa: Different Options To Consider

Financial planners will always tell you to diversify your portfolio. After all, you never want to put all of your eggs in one basket, so to speak. If you want to invest in Africa but are a bit worried about the risks of emerging or frontier markets, a mutual fund or an exchange-traded fund (ETF) can be good options to consider.

Mutual funds and ETFs are funds that contain many different holdings. With stocks, you are purchasing shares in one specific company, but with a mutual fund or ETF, you purchase shares in many different companies. Because these funds are diversified, this can limit your risks. If one of the companies in the fund does poorly, the other companies might do well and help the fund maintain profitability.

The key with either type of fund is to study the holdings carefully and do some research about each holding or company. Study the country weightings, as well. In some cases, you might find an Africa ETF where the percent of net assets isn’t really concentrated in Africa, but in China or the United States or Canada or another developed country.

This isn’t necessarily a bad thing, but many people choose to invest in Africa for reasons beyond financial gain. Making a profit is always the goal, but if you are searching for a socially responsible type of investment, an Africa ETF that is truly focused on African countries and African people can be a good option to consider.

If you are focused on socially responsible investing, there are also hundreds of Africa-based companies as well as other types of investment opportunities where you can purchase direct shares. For instance, you could purchase shares in a farming collective or agribusiness or perhaps invest in a company that focuses on providing clean energy, low-cost internet or clean water to people in a particular country or region.

These can be trickier to find but contacting a brokerage firm that specializes in investments in Africa can be a good place to start looking for options. If you opt for an investment such as an Africa ETF, these can be purchased more easily typically through your regular broker or even from online brokerage firms. There are also frontier market ETFs that might include some African companies in the mix.

In the final analysis, learning how to invest in Africa can be more complicated than investing in developed markets, but there are profitable options to explore. If you want to invest in Africa, speak with your trusted financial advisor to find an African stock or Africa ETF that might suit your portfolio, but, again, it’s always wise to research these investments yourself to ensure that you have picked an investment that is the best fit for your financial goals.