In recent months, a massive influx of investment dollars into African companies themselves, and into African exchange traded funds (ETF’s), have produced steep gains for investors in the emerging market of Africa.
In addition to the billions of dollars China continues to invest into Africa (as described in my March article about Chinese Overseas Investment), we are now seeing a significant surge in investment dollars directly into ETF’s of the region. According to Reuters “through the first seven months of (2010), the flows into Africa regional funds are already pretty close to four times the previous best year (of 2007).” It appears that Africa is emerging as the emerging market.
Not surprisingly, this impressive acceleration of investments is rewarding investors in African ETF’s. From 01 July to 05 October 2010 the Market Vectors Africa Index ETF (symbol AFK) is up over 21%, while EZA, another index-based African ETF, is up over 30%. These results can give quite a nudge along the risk-reward line.
IS IT TOO LATE?
In the aforementioned March article I alluded to Africa as the Brazil of many years ago. But analyzing more quantitatively — going back 10 years for example — we see that the iShares MSCI Brazil Index Fund is up over 4 times to date, producing an annualized return of approximately 28%. And due to hiccups during the first five years of the last decade, even waiting until 2005 to invest in the fund still would have returned over 3.5 times investor principal.
The parallels between the South American country of the recent past and today’s African continent are compelling: vast resources of ores, precious metals and oil awaiting exploration or extraction, extensive cultivable land, a sizeable population of inexpensive labor, and insatiable demand from foreign countries also eager to assist with infrastructure development. This insatiable demand — manifested to the tune of billions of dollars from China alone — is arguably even more prominent in today’s Africa.
All of this creates a massive investment flux into Africa, along with commensurate gains in regional funds as investors are now increasingly placing their money into a limited number of African ETF’s. This suggests that the African bull not only has legs, but has only just been released from the bullpen.
As we saw with the Brazil indexes earlier this decade, the ride may not be smooth. But via ETF’s like AFK and EZA patient investors can join saavy investors — including the Chinese government — and invest in this rapidly-emerging, emerging market.
Africa the Good news: African equity funds enjoy record inflows
Full Disclosure: Author owns shares in AFK but not EZA at time of writing.