Investing in African stocks strikes many investors as impractical at best and foolhardy at worst. I disagree. Here are a few reasons why the continent is the first place I look for investment bargains.
1. Africa’s where the growth is.
Strengthening consumer appetites, a resurgent demand for commodities, and reduced debt loads have African economies firing on all cylinders. Economists expect 23 African economies to grow by 5.0% or more in 2011. The US’s economic growth will likely fall short of 3.0%.
2. African stocks are cheap.
Typically, rapid economic growth translates into sky-high stock prices. Not so in most African markets. The P/E ratios of the continent’s blue chip stocks routinely fall into the single digits. Zambia’s Lafarge Cement, Kenyan oil marketer KenolKobil, and Ghana’s FanMilk currently sell for 7.8, 4.8, and 9.9 times their respective earnings. The S&P 500 index’s 20.3 ratio is bloated in comparison.
3. African markets have little to no correlation with Wall Street indexes.
Thanks to their small size and low visibility African markets tend to march to the beat of their own drummers. If global markets “zig,” they might very well “zag.” Thus, a few positions in African stocks help reduce the volatility of a stock portfolio.
4. To help develop Africa’s capital markets
Each dollar invested in an African stock helps to build the liquidity of the exchange on which it trades. Rising liquidity lowers risk. Lower risk attracts additional investment to the exchange. Greater investment on the exchange lowers the cost of capital for listed companies. A lower cost of capital leads to increased growth and job creation.
5. African markets are more accessible than ever before.
Africa remains a relatively difficult place to invest, but it’s becoming less so with each passing year. More and more funds, ADRs, and African ETFs are hitting the market. African exchanges have improved their trading systems and governance while brokers are improving their quality of service.
This list is by no means exhaustive, but it captures the essence of what makes African stock markets such a compelling opportunity.
Do you invest in Africa? If so, tell us why in the comments?