If you are seeking new financial opportunities in which to invest, Africa can be an interesting option to explore. With more than 50 countries and thousands of investment options, the African continent is rich in natural resources and industry and infrastructure continue to expand.
Who Is The Africa Investor?
The Africa investor is someone who isn’t immune to taking occasional investment risks, and also possibly an individual that seeks to help bolster the economies of this vast continent. Additionally, this may be an individual interesting in boosting their portfolio by investing in natural resources, including exploration and mining. If you are interested in investing in Africa, here are a few facts to consider.
1. Emerging Markets In Africa Vs. Frontier Markets
When investing, you have the option of investing in companies in established markets, emerging markets and frontier markets. Established markets, such as the United States, Japan and the United Kingdom have long-established stock markets and stable currencies.
Investing in an established market is not without risk, but there tends to be less risk than with an emerging market or frontier market. Emerging markets generally include countries with fairly stable governments and economies. For the Africa investor, Egypt and South Africa are the only African countries listed as emerging markets.
Frontier markets are a step below emerging markets, typically nations poised for growth, but with historically low market access. For instance, Iceland, with one of the world’s highest standards of living is a frontier market. Iceland has a stable economy and currency, but investment opportunities have been limited, therefore, it is listed as a frontier market.
In Africa, frontier markets include Kenya, Mauritius, Morocco, Nigeria, Tunisia and the West African Economic and Monetary Union (Benin, Senegal, Cote D’Ivoire and Burkina Faso). These are considered somewhat riskier investments than emerging market investments but can be highly profitable, as well.
Additionally, Botswana and Zimbabwe are listed as “standalone” countries, and these are typically nations poised for growth that have not quite reached frontier market status. Any of these options (emerging, frontier or standalone) can be profitable, although, as with any investment, profit is never guaranteed and even companies in established markets can yield poor returns.
2. An Africa ETF Can Be An Easy Option
Exchange-traded funds are diversified funds with multiple holdings, which can decrease risk. If one of the companies in the fund experiences trouble, the other holdings can help to keep the price of the ETF stable.
Whether you opt for an emerging market ETF or a frontier markets ETF, choosing this type of fund can help to minimize your risk. Because market access to many countries in Africa is limited, an ETF also provides you with an easy way to gain access to companies in Africa.
There are many options to consider. For instance, you might opt for a South Africa ETF or an Egypt ETF or perhaps an Africa ETF that includes holdings throughout the continent. These can be bought and sold easily using your broker or even online brokerage firms.
3. Consider The TSX Venture Exchange
We’ve all heard of the NASDAQ and the New York Stock Exchange (NYSE) or exchanges such as the Nikkei in Japan or the London Stock Exchange, but there are many others out there and a few are classified as venture exchanges, which include companies that are considered to be emerging.
While you will find investments such as Google, Apple and Microsoft on the NASDAQ, a venture exchange will include smaller companies around the world where you can purchase shares. For instance, the Toronto Stock Exchange (TSX) includes the TSX Venture Exchange Market (TSXV) and if you have a brokerage account that supports foreign trading, you can purchase shares in this market.
The TSXV offers a wide range of emerging companies from countries around the globe, including countries in Africa. This can be one way to gain access to countries in specific African nations or for a specific company or industry that interests you.
4. Research Each Holding Carefully
Whether you opt for an Africa ETF or select a company on the TSXV, research is going to be your strongest ally. It is important to research each company, whether you are purchasing stock from just one company or for many companies listed in an ETF.
With an ETF, you can study fact sheets to determine the top 10 holdings in the fund. An ETF might include 20 or more holdings, but typically the percentage of net assets is concentrated more heavily in some companies than others and the top 10 holdings can make up 50% or more of the fund, so these are the companies that you will want to research the most carefully as they have the potential to impact the overall performance of the ETF more than other holdings.
For instance, perhaps the top holding makes up 5% of the entire ETF, while the bottom holding makes up just 0.23% of the fund. If the bottom holding earns poor returns, it probably won’t affect the overall performance of the fund severely, whereas a company that holds 5% of the net assets in the fund can make a bigger impact if it earns well or loses money.
If you opt to invest in a specific company rather than using an ETF, spend some time getting to know the company and its players. While the company website can be informative, it is smart to see what others say about this particular investment, so search the internet far and wide to find out all that you can about the company. This is particularly important with investments in emerging and frontier markets, as these can be riskier in general.
5. Balance Out Your Portfolio
A balanced portfolio includes many investment options that yield slow and steady results, but it also can contain a few short-term investment options to yield quick profits. As the old saying goes, you never want to put all of your eggs in one basket, but that doesn’t mean the occasional riskier investment option is a bad idea.
It can be smart to invest in some tried-and-true companies with high stability, but it also can be wise to take a few small risks now and then as this can improve the overall profitability of your portfolio.
Of course, for the Africa investor, there may be other reasons why you decide to invest in Africa. Perhaps you are searching for socially responsible investment options in which to invest. Africa can be an excellent option because when you invest in Africa-based companies, you can help to boost the local economy.
The trick with socially responsible investing is to ensure that the investments include companies owned by Africans and not foreign companies seeking to invest and make a quick profit in Africa. Additionally, you will want to research other factors such as working conditions, environmental impacts and how the companies give back to their community.
At Money Watch Africa, we are here to help the Africa investor learn more about investment opportunities and how to invest in Africa. Keep checking back as we continue to update our website with informative articles about investing in this diverse, dynamic continent.
