Join        Login             Stock Quote

Does Sub-Saharan Africa Deserve A Slice Of Your Portfolio?

 December 31, 2012 09:57 AM

"One of the most remarkable features of the global economy over the past fifteen years has been the striking surge of economic growth over much of sub-Saharan Africa," Charles Collyns, assistant secretary for international finance at the US Treasury, advised earlier this month. We've heard this story before, of course, only to discover that the investment results fell short of the headlines. Is it different this time? Possibly. For some perspective, let's spin a few numbers and take a look at an ETF that focuses on investing in the stock markets in this neck of the world.

The economies that comprise Sub-Saharan Africa are expected to post aggregate real GDP growth of 5.3% next year, according to IMF projections. That looks pretty good compared with the U.S., which will see real GDP rise by just 2.1% in 2013, the IMF predicts. China will do much better, with an expected GDP increase of 8.2%. As for the actual growth rates in the recent past, Sub-Saharan Africa's GDP expanded 5.2% last year vs. China's 9.2% rise. Both gains compare favorably with the meager 1.8% increase for the US in 2011.

[Related -Tackling China's Debt Problem: Can Debt-Equity Conversions Help?]

[Related -Will Job Growth Kill The Bear-Market Signal For Stocks?]

"Economic conditions in sub-Saharan Africa have remained generally robust against the backdrop of a sluggish global economy," the IMF noted in its October outlook for the region. Not surprisingly, there's a wide variety of conditions within individual nations:

Most low-income countries continue to grow, although drought in many Sahel countries and political instability in Mali and Guinea-Bissau have undermined economic activity. The situation is less favorable for many of the middle-income countries, especially South Africa, that are more closely linked to European markets. Inflation has been slowing, as pressures on food and fuel prices eased following a surge during 2011. The easing of inflation has been particularly noticeable in eastern Africa, helped by monetary tightening.

How does all this translate for equity returns in the region? As a benchmark for performance, consider a Sub-Shaharan Africa ETF: Market Vectors Africa Index ETF (AFK). By several yardsticks, it boasts an impressive track record. Consider how trailing 1- and 3-year returns compare:

Matched against emerging markets generally, AFK has had a good run over the past 12 months. For the year through yesterday, Market Vectors Africa is up a strong 18.5%. That beats equities from many corners of the world, although it's been a good year for stocks generally and so return spreads aren't terribly wide. In fact, European stocks are clearly in the lead for the past 12 months--the euro crisis be damned.

The question is whether Africa's equity markets have finally come of age to the extent that they deserve a dedicated slot in your asset allocation? Possibly, but I'm not yet convinced. You can already juice rebalancing opportunities by breaking foreign equity exposure into several pieces before targeting Africa separately. Does slicing up the foreign stock beta into finer pieces beyond the usual buckets--Europe vs. Asia or developed vs. emerging, for instance—further enhance expected return and offer more control for managing risk?

Definitive answers must remain a gray area, thanks to the standard nemesis: an uncertain future. But as the Sub-Saharan GDP table above suggests, the region has a track record of growth in recent history, and so the projections for more of the same ring a bit truer these days. It doesn't hurt that there's a wider selection of investment products targeting Africa these days, of which AFK is only one. (See ETFdb's Africa ETF guide, for instance.)

Yes, many of Africa's nations are among the more hazardous spots in the world from a geopolitical standpoint. But macro success, such as it is, attracts a crowd and so it's getting easier to rationalize carving out a dedicated allocation to stocks in Sub-Saharan Africa.

Update: An earlier version of this story mislabled the years for GDP growth rates in the 2nd paragraph. The corrections now appear.



Post Comment -- Login is required to post message
Alert for new comments:
Your email:
Your Website:

rss feed

Latest Stories

article imageTackling China's Debt Problem: Can Debt-Equity Conversions Help?

China’s high and rising corporate debt problem and how best to address it has received much attention read on...

article imageWill Job Growth Kill The Bear-Market Signal For Stocks?

It’s all about jobs now. Actually, it’s always been about jobs. But the stakes are even higher—perhaps more read on...

article imageAutomating Ourselves To Unemployment

In this current era of central planning, malincentives abound. We raced to frack as fast we could for the read on...

article imageFed: Waiting For June… Or Godot?

The Federal Reserve left interest rates unchanged yesterday, as widely expected. But the possibility of a read on...

Popular Articles

Daily Sector Scan
Partner Center

Fundamental data is provided by Zacks Investment Research, and Commentary, news and Press Releases provided by YellowBrix and Quotemedia.
All information provided "as is" for informational purposes only, not intended for trading purposes or advice. iStockAnalyst.com is not an investment adviser and does not provide, endorse or review any information or data contained herein.
The blog articles are opinions by respective blogger. By using this site you are agreeing to terms and conditions posted on respective bloggers' website.
The postings/comments on the site may or may not be from reliable sources. Neither iStockAnalyst nor any of its independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. You are solely responsible for the investment decisions made by you and the consequences resulting therefrom. By accessing the iStockAnalyst.com site, you agree not to redistribute the information found therein.
The sector scan is based on 15-30 minutes delayed data. The Pattern scan is based on EOD data.