African stocks can be a deal for attentive U.S. investors

Despite risks of corruption and instability, Africa offers investors rewards.
Despite risks of corruption and instability, Africa offers investors rewards. (GEORGE OSODI / AP, File Photograph)
Posted: March 25, 2013

If there's a last frontier for U.S. investors, it's Africa. The world's second-most populous continent is an afterthought for anyone looking to construct a diversified portfolio of foreign stocks.

Consider that there are just two mutual funds specializing in African stocks, compared to more than 100 focusing on Europe and about three dozen focusing on China. So much for the vast continent and its wealth of oil, minerals, and metals.

Another sign of Africa's low profile is the dearth of information about the stocks of its top publicly traded companies. Check the business pages of a newspaper or an investing website, and it's relatively easy to find data on the performance of indexes from most foreign countries or regions. But you'll probably have to look elsewhere to find references to the few African indexes, such as the MSCI Emerging Frontier Markets Africa or the Dow Jones Africa Titans 50.

"It's probably the world's last great untapped market," said Derrick Irwin, comanager of the Wells Fargo Advantage Emerging Markets Equity fund. Unlike the two Africa-focused funds, Irwin's is geographically diversified, owning stocks across a broad swath of the world's fastest-growing economies.

Irwin sees growing opportunities in African stocks as well as foreign companies that do business there, and it's not just because of the natural resources. He sees the greatest potential in its 1 billion people and the expansion of Africa's middle class.

One indicator: Nigerian sales of Guinness beer now surpass those in Ireland, despite the dry stout's origins in Dublin. That's made Africa's most populous country a key growth market for Guinness parent Diageo, based in the United Kingdom. It was clear in the grocery stores "that Guinness and Heineken dominate the market," Irwin said.

Many investors have been scared off by Africa's poverty and, in some countries, the seemingly intractable political instability and corruption. They are among the reasons investing in Africa requires a strong will.

Expect sharp ups and downs in performance. In an interview, Irwin discussed risks and rewards.

Question: What are Africa's key strengths, from the standpoint of U.S. investors?

Answer: There's huge growth potential. The top five African economies have more than 400 million people. Across sub-Saharan Africa, there are more than 425 million cellphone subscribers.

Q: As an American consumer, I don't see any African brand names on the shelves, or any visible indications that African companies have a substantial presence in the global economy. Am I missing something?

A: It's there, it's just that Americans don't see it. A lot of the trade with African countries is with other emerging markets in places like China, India, and Turkey. That trade has increased about tenfold over the last decade.

Q: So why hasn't U.S. investing taken off?

A: Africa is one of those markets where the story looks so good on paper that it often gets disassociated from the investment realities.

For example, Nigeria has unspeakably bad infrastructure. Traffic is horrible. And it's incredibly hard for foreigners who want to invest directly in Nigeria. One reason is the bureaucracy. All the worst aspects of the old British bureaucracy are still in place, but with an economy that's 50 times larger than it was in the colonial era. And it's hard to overstate the corruption and cronyism.

Q:What about corporate governance?

A: It's not even close to what it is in the developed world. There are exceptions. It's world-class at South African banks. But it's much different with Nigerian banks. They take deposits, charge for it, and give out loans to a small segment of the population, and to medium and large corporations. They don't offer credit cards or mortgages, and that's a humongous opportunity for foreign companies.

 Q: What advice would you offer to an investor looking for specific exposure to African stocks?

A: You can't just rely on the financial statements that companies issue. You have to understand how these businesses operate, and where the opportunities are. It's probably more important in Africa than anywhere else to spend time on the ground, kicking the tires.

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