New ETF to Ease Investment in Nigeria

I’m a big fan of the folks at Van Eck Global. They’re making frontier stock markets more accessible than ever before. Over the past three years, the money manager has launched exchange-traded funds (ETFs) covering Colombia, Indonesia, and Vietnam. It also set up the most diversified African ETF, the Market Vectors Africa Fund (AFK).

Now they’re preparing to launch a Nigeria ETF, which, to my knowledge, would be the first of its kind.

The fund will try to mirror the performance of the Market Vectors Nigeria Index, which is comprised of companies that are either based in Nigeria and listed on its stock exchange or companies that generate the majority of their revenue in Nigeria.

Van Eck hasn’t yet announced a launch date for the fund, but, in my mind, it can’t come soon enough. The Nigerian market looks like a promising place to park some assets.

Photo by Sremeika

Just last month, Morgan Stanley released a very bullish report on the Nigerian economy in which they forecasted growth of 8.4% this year and 8.5% next year. If the country stays on its current growth trajectory, it will likely overtake South Africa and become the continent’s largest economy by 2025.

Notably, Morgan Stanley’s analysts don’t see oil being the prime driver of this growth in the near term. Instead, they see the telecommunications, construction, and retail sectors doing the heavy lifting. Why? The government recently raised the minimum wage by more than 5%, putting more money in consumers’ pockets. There’s also big infrastructure spending on the horizon and a system to remove bad debts from banks’ balance sheets.

Unfortunately, we don’t yet know which specific companies will constitute the Nigeria ETF, but I’m guessing the following companies will be represented.

  • Nigerian Breweries (PE Ratio: 21.9, PB Ratio: 13.3, 5-year Annual Income Growth: 29.7%) – Majority-owned by Heineken, the country’s largest brewer has posted phenomenal earnings growth the past few years. The increasingly affluent population should ensure that there’s plenty of beer to be sold in spite of increasing competition.
  • Zenith Bank (PE Ratio: 12.4, PB Ratio: 1.3, 5-year Annual Income Growth: 23.7%) – With the Nigerian government absorbing its toxic loans, Nigerian banks like Zenith look to be on the turnaround. Zenith prides itself on being a technology-leader among its peers and is the country’s largest bank in terms of market value. It also operates subsidiaries in Gambia, Ghana, and Sierra Leone.
  • Guaranty Trust Bank (PE Ratio: 11.7, PB Ratio: 1.7, 5-year Annual Income Growth: 34.7%) – The first Nigerian bank to cross-list on the London Stock Exchange, GTBank operates 160 branches throughout the country. It is a leader in business banking and known for its innovative products.
  • First Bank of Nigeria (PE Ratio: 12.9, PB Ratio: 1.2, 5-year Annual Income Growth: 18.9%) – First Bank traces its roots back 117 years and is a leader in the retail banking segment. Management has recently hinted at an acquisition that would expand its geographic footprint well beyond its Nigerian home.
  • United Bank for Africa (PE Ratio: 17.0, PB Ratio: 0.8, 5-year Annual Income Growth: -43.5%) – One of Africa’s most geographically-diversified banks, UBA operates in 18 African countries. It intends to launch subsidiaries in Congo-Brazzaville and Mali this year.

I expect fees to be roughly equivalent to the Market Vectors Africa Index ETF (AFK). AFK’s annual expense ratio presently stands at 0.83%.

Disclosure: I have a long position in the Market Vectors Africa Index ETF (AFK).

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How to Invest in South African Stocks — from Main Street, USA

Setting up African brokerage accounts isn’t a whole lot of fun. In fact, it can be downright tedious.

So I try to avoid the process as much as possible and content myself with the ever-expanding universe of South African stocks available in the form of ADRs, ETFs, and OTC listings.

But the vast majority of South African stocks don’t trade anywhere outside of the Johannesburg Stock Exchange (JSE). Some of these companies trade at bargain prices and conduct business across the continent – making them compelling opportunities.

Lazy investors like me can now trade these stocks without opening a foreign brokerage account. Three US-based discount brokers – Everbank, Fidelity, and Schwab – offer their customers direct access to the South African stock market.

Presently, none of these brokers offer online trading on the JSE, but the process of buying and selling shares is straightforward. You simply call them up, and place your trade through a live, human broker. If the JSE is open, your trade will take place in real time. If it isn’t, the order will be executed first thing on the next trading day.

Photo by Keso

Here are the details of each broker’s offering:

  • Evertrade offers the most accessible fee structure of the trio. They charge a commission of $35 per trade plus any South African taxes and settlement fees. No minimum trade amount is required.
  • Schwab charges either $100 per trade or 0.5% of the total trade amount – whichever is more. On top of this, they collect a 1.55% “mark-up fee,” which covers local taxes and pass-thru charges from their South African broker partner. Their minimum trade amount is $5000. A trade of that size will set you back a total of $127.50 in the form of commissions and fees.
  • Fidelity’s commission is $32.95 plus a $50 settlement charge. Their South African partner also charges a .71% mark-up fee to cover currency conversion and local taxes. Note, too, that Fidelity requires a hefty minimum trade amount of $50,000. So, Fidelity customers should expect to shell out at least $437.95 worth of commissions and fees per trade.

As you can see, commissions of this size will add up in a hurry. So, unless you plan to buy and hold a small number of South African stocks, it probably makes more sense to open an account with a South African broker – a process that we’ll cover in a future post.

Do you trade South African stocks through any of these brokers? Or do you have an account with a South African broker? I’d love to hear what your experience has been with them. Tell us about them here in the comments or drop me a line in the contact form.

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Betting On Africa: IBM

IBM’s presence in Africa dates back more than 50 years, but it’s a much different company now than it was back then. Big Blue has evolved from a computer manufacturer into a one-stop IT solution, well-suited to the African context. Got an inefficient power grid? They can help with that. Is your bank’s computer network slow as molasses? They can fix that, too.

Photo by IBM

Many multinational corporations boast expansive – and expanding – African operations, which offers an investor numerous ways to participate in the continent’s growth story. In this series, we’ll take a look at how these household names engage African markets and its impact on the corporate bottom line.

 

IBM’s (Ticker: IBM) presence in Africa dates back more than 50 years, but it’s a much different company now than it was back then. Big Blue has evolved from a computer manufacturer into a one-stop IT solution, well-suited to the African context. Got an inefficient power grid? They can help with that. Is your bank’s computer network slow as molasses? They can fix that, too.

Capabilities like these have made the company a major player in Africa where much of the IT infrastructure is obsolete – if it exists at all. With the recent opening of branch offices in Senegal and Tanzania, IBM now operates subsidiaries in 20 African countries. The company has invested more than $300 million in the region since 2006.

This big bet is now paying off. Late last year, IBM won a major contract to supply Bharti Airtel with the technology it needs to extend its cell phone network deep into the continent’s countryside. Analysts estimate the 10-year deal to be worth in the neighborhood of $1.5 billion.

And there’s a lot more opportunity where that came from. Undersea fiber-optic cables landed on the East African coast in 2010. Their arrival paved the way for a multitude of IT systems that would previously have been infeasible. IBM believes developments like these will expand the African IT market from its present size of $8.5 billion to $12.5 billion by 2015. That’s growth of nearly 12% per year.

How significant is Africa’s contribution to IBM’s corporate sales? This is an exceedingly difficult figure to ascertain. You see, IBM doesn’t break its financial results down by country – or even by continent. Instead, it consolidates its African figures with its European and Middle Eastern results. (I’m sure there is a very good reason for this apart from frustrating the occasional Africa business writer. But it would seem the company could provide a bit more granularity in its sales figures and still avoid revealing strategically-sensitive data to its competitors.) The company does, however, drop enough hints to be reasonably certain that African sales represent less than 5% of the corporate total.

Does that mean IBM’s Africa operations are insignificant from an investment perspective? Certainly not. Without its business in Africa and other emerging markets, IBM’s 2010 sales growth would have been an anemic 1.0% instead of the actual 3.3%. That’s a substantial difference for such a behemoth of a company, and it helps to justify the stock’s 2.0 price/sales ratio.

Perhaps more importantly, the continent’s lack of infrastructure provides fertile ground for innovation. Unconstrained by legacy IT systems, IBM can design and implement cutting-edge technologies for its African clients that will ultimately create positive spin-offs for the corporation as a whole.

Disclosure: At the time of publication, Ryan did not own shares of any company mentioned in this article.

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Birth of an Africa Investor

Africa tends to capture the hearts of its guests.

It happened to me soon after stepping off an airplane into the chilly mountain air of Lesotho 14 years ago. My three-year sojourn as a volunteer in the country changed me into a certifiable Afrophile.

Upon my return stateside, I sought to remain as engaged with the continent as distance would allow. I found an Africa-focused job. I read Africa-focused books. I even listened to the BBC’s Focus on Africa over my battered shortwave radio.

Strangely enough, the thought of investing in Africa didn’t even occur to me until years later.

In my mind, the continent was a charity case – not an investment opportunity. I didn’t hesitate to send money to Africa for the purpose of buying mosquito nets, building schools, or granting no-interest loans, but the thought of investing in an African business with the expectation of a return seemed avaricious.

One day, I happened upon the Botswana Stock Exchange’s website. It fascinated me. Here, investors traded shares of banks, a wholesaler, a furniture retailer, and others. Many of these companies appeared to be generating huge profits in one of Africa’s most stable countries, yet the market priced them at little more than liquidation value. Something clicked in my thick skull. These businesses were poised to create many more jobs than any foreign aid organization, but a lack of capital constrained them from doing so.

So, I emailed a local broker, asking if and how a foreigner could purchase shares. He replied the next day. He assured me that I could indeed invest, and he walked me through the straightforward process of opening a trading account. Within weeks, I owned shares of Letshego, a bargain-priced micro-lender.

Further research revealed roughly a dozen more African stock exchanges. I soon invested in many of those, too. Each new market I explored revealed compelling stories. The investment process didn’t always go as smoothly as my Botswana experiment did, but, overall, the rewards justified the time and effort. I was hooked.

My goal with this blog is to help other small investors participate in Africa’s capital markets, and, in so doing, make a modest contribution to the region’s economic growth.

That’s my story. I’m eager to hear yours. What sparked your interest in African stock markets? What information do you need to start investing in the region? Share your thoughts here in the comments or shoot me a message via the contact form.

Disclosure: I own shares of Letshego.

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In The Pink: South African Stocks On The OTC Market

If you’re like me, the mere mention of the term “Pink Sheets” induces skepticism. There’s good reason for this. The Pink Sheets are essentially unregulated. Trade volumes are thin. And financial information can be skimpy.

But while buying stock on the over-the-counter market is certainly not for the faint of heart, there are several good reasons for US-based Africa-investors to give the Pink Sheets a look.

1. They offer a wider universe of African stocks

ADRs for nearly 50 South African stocks trade on the Pink Sheets. Most don’t trade in significant volume, but a few boast average daily volumes in excess of 1000 shares.

Here’s a list of the most liquid South African ADRs on the Pink Sheets:

Anglo Platinum Ltd (AGPPY.PK)

Impala Platinum Holdings Ltd (IMPUY.PK)

Kumba Iron Ore Ltd (KIROY.PK)

Massmart Holdings Ltd (MMRTY.PK)

MTN Group Ltd (MTNOY.PK)

Murray & Roberts Holdings Ltd (MURZY.PK)

Naspers Ltd (NPSNY.PK)

Nedbank Group Ltd (NDBKY.PK)

Pretoria Portland Cement Company Ltd (PPCYY.PK)

Sanlam Ltd (SLLDY.PK)

Shoprite Holdings Ltd (SRHGY.PK)

Standard Bank Group Ltd (SBGOY.PK)

Telkom S.A. Ltd (TLKGY.PK)

Tiger Brands Ltd (TBLMY.PK)

There are some very interesting companies here, and many of them possess continent-wide reach.

2. Pink Sheet listings can be traded through most US-discount brokers

If you’re interested in only the very largest stocks on the Johannesburg Stock Exchange, there’s no need to go through the hassle of opening a South African brokerage account. Trading Pink Sheet stocks is nearly as convenient as buying and selling stock on the main board. Orders can be placed online and commissions are typically the same.

3. No currency exchange costs

In order to purchase shares of South African stock, you would normally be obliged to change dollars into rand. Depending on the amount exchanged, the spread between the bid and ask price can be significant. In fact, one US-based discount broker that does allow its customers to trade on the Johannesburg Stock Exchange charges a 1% fee on the total amount of currency converted. That’s nothing to sneeze at. Pink Sheet stocks trade in US Dollars, allowing investors to avoid such costs.

Of course, you should carefully consider your bid and offer prices before making a trade on an illiquid stock. Use limit orders to avoid an unpleasant surprise when reviewing your trade confirmation. You should also ensure that you can easily locate and interpret financial information pertinent to your investment.

If you’re comfortable with these caveats, a Pink Sheet ADR might be a worthy addition to your portfolio.

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