Africa ETFs: Investors warm to Africa

Jan 25th, 2012 | By | Category: Equities

Global institutional investors intend to make their first significant step into Africa over the next five years, raising their investments sharply from current low levels, according to a report commissioned by fund manager Invest AD and written by the Economist Intelligence Unit.

Africa’s emerging middle class is catching investors’ eyes, ahead of commodities and natural resources.

Africa’s emerging middle class is catching investors’ eyes, ahead of commodities and natural resources.

Based on a survey of 158 senior executives at institutions such as pension and endowment funds and insurance firms, the report entitled “Into Africa: institutional investor intentions to 2016” found that the world’s major investors are most excited by the continent’s emerging middle class.

In a video interview, head of asset management at Invest AD, Mohammed Al Hashemi, noted that “many of the investors surveyed don’t have any allocations in Africa, yet looking out over the next five years, the bulk of the investors will have an allocation into Africa and about a third will have more than 5% allocation.”

Mr Al Hashemi attributed this increase in investment into Africa to “urbanisation, greater consumer spend, the rise of the middle class” and noted a move away from commodities. In the interview he goes on to address the reduction in risk in Africa, as well as discussing some of the sectors that his funds are investing in.

Key findings

– Institutional investors see Africa as holding the greatest overall investment potential of all frontier markets globally. At an aggregate level, when asked to choose two regions out of five, two-thirds (66%) of investors with an interest in frontier markets see African frontier markets such as Nigeria or Kenya as holding the greatest opportunity. This puts the continent ahead of frontier Asian markets (selected by 44%) and Latin American ones (29%). Many economic forecasters predict that the region’s growth rate will outstrip all others in the coming five years. Ghana is likely to be the world’s fastest growing economy overall in 2011, for example, expanding at an estimated 16.3%.

FEATURED AFRICA ETFs/ETNs

DB X-tracker MSCI EFM Africa Top 50 Index ETF

RBS MSCI EFM Africa ex South Africa ETF

Van Eck Market Vectors Africa Index ETF

Standard Bank Africa Equity Index ETN

– Institutional investors plan to increase their asset allocation in African markets over the coming five years. Even among frontier markets investors, most are only just starting to explore African markets. One in five of those surveyed have zero allocation; among larger investors with more than US$10bn under management, this is closer to one in three. Another one-quarter (24%) overall has less than 1% allocation, often as part of a pooled investment in global frontier markets. By 2016, however, all expect to have some exposure to emerging Africa, with nearly one-third expecting to shift at least 5% of their fund value there.

– Investors are moving towards longer-term investment strategies for Africa, rather than more speculative, short-term bets. Since 2004-05, Africa’s capital inflows can be characterised in two waves: a pre-2008-crisis wave of low-cost capital in search of short-term yield, which evaporated at the collapse of Lehman Brothers; and a post-crisis emergence of more targeted country-specific investments. Nearly two-thirds (64%) of investors agree that market volatility, partly due to limited liquidity, now requires a longer-term investment approach.

– Africa’s emerging middle class is catching investors’ eyes, ahead of commodities and natural resources. The continent’s bountiful natural resources—from 10% of the world’s oil to as much as 90% of its platinum group metals—has long made it a largely natural resources play. But it is its emerging middle class, which now numbers more than 300m of Africa’s total 1bn people, that is increasingly catching investor attention. Four in ten investors (39%), when asked to choose the top three out of 12 features, selected this as the most attractive aspect of investing in African frontier markets, ahead of high commodity prices (34%) or high growth rates (35%).

– Investors now worry more about technical concerns than about macroeconomic and political risks, at least in key markets. In some regards, Africa’s biggest challenge is to overcome deeply entrenched perceptions. But a striking shift that can be observed among investors is a change in focus from macroeconomic and political worries towards more technical market concerns. Investors were asked to choose up to three main concerns out of a list of 15 challenges of investing in African frontier markets. Although bribery and corruption is the headline worry for investors (selected by 41%), concerns  about weak institutions (40%) and illiquidity in capital markets (36%) are not far behind. This reflects the steady political and economic stabilisation of many key markets over the past decade.

Investing directly into Africa has caught many unseasoned investors out. Therefore, the best way to play this theme is via a fund. Currently, there aren’t a huge number of exchange-traded products available. That said, we list the main ones below:

Pure Africa

DB X-tracker MSCI Emerging and Frontier Markets Africa Top 50 Index ETF
Provides exposure to South Africa, Egypt, Nigeria and Morocco.

RBS MSCI Emerging and Frontier Markets Africa ex South Africa ETF
Provides exposure to Egypt, Nigeria, Morocco, Kenya, Tunisia and Mauritius

Van Eck Market Vectors Africa Index ETF
Provides exposure to companies that are headquartered in Africa or that generate the majority of their revenues in Africa; includes holdings in South Africa, Nigeria, Morocco, Egypt and Kenya.

Standard Bank Africa Equity Index ETN
Provides exposure to a diversified basket of shares across 28 African counties.

South Africa

iShares MSCI South Africa ETF

HSBC MSCI South Africa ETF

RBS Market Access FTSE/JSE Africa Top40 Index ETF

Lyxor South Africa (FTSE/JSE Africa Top 40) ETF

Europe, Middle East and Africa (EMEA) Emerging Markets

Credit Suisse MSCI Emerging Markets EMEA ETF
Provides exposure to African emerging markets including Egypt, Morocco and South Africa, as well as other emerging markets across Europe and the Middle East.

Source FTSE Emerging EMEA 40 ETF
Provides exposure to South Africa (largest country weight), as well as other emerging-market countries across Europe and the Middle East.

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