Outlook for Africa ETFs strong, as African economy looks set for growth

Jun 27th, 2012 | By | Category: Equities

After the crises of the past, the economies of many African countries are clearly heading for growth. Political and economic stability has increased above all in the countries of the Sub-Saharan region. “Medium-term growth potential in Sub-Saharan Africa ought to be about 6% per annum in the years ahead”, a new study by Commerzbank, Germany’s second-largest bank, reveals.

Outlook for Africa ETFs strong as African economy heads for growth, Commerzbank study shows

The commodity boom and the turnaround to stability-oriented economic policy have increased the crisis-resistance of many countries in this region, says Commerzbank.

According to the study, countries which manage to attract foreign investors could actually see even higher growth, since investments like these frequently initiate or boost growth momentum. With an economic growth forecast of 5.4% for 2012, the region is now already ranking directly behind front-runner Asia.

The commodity boom and the turnaround to stability-oriented economic policy have increased the crisis-resistance of many countries in this region. Some of the states have thus already recorded notable surpluses in current account and government budget.

The prerequisites for further economic growth, according to the study, are a stable political framework and a large population which allow higher economies of scale with fixed investment costs, plus good availability of commodities. Countries which meet these criteria include in particular Nigeria, Ghana, Angola and Mozambique.

FEATURED PRODUCT

DB X-tracker MSCI EFM Africa Top 50 Index ETF (XMAF)

– Provides diversified exposure to the fast-growing
African economy via 50 companies listed in South Africa,
Nigeria and Egypt

– Financials account for 37.43%, Materials 13.19%,
Consumer Staples 12.43%, Consumer Discretionary
10.28%, Industrials 10.10%, Telecommunications 9.42%,
Energy 4.98% and Healthcare 2.18%

– Over-collateralised (currently 115.52%) swap-based
replication, with full transparency to index constituents
and underlying collateral holdings

– Listed on London Stock Exchange, Deutsche Börse
(Xetra) and Borsa Italiana. Registered across much of EU

– UCITS compliant, UK Distributor Status, eligible for
ISAs and SIPPs, TER 0.50%

“The greatest challenge for Sub-Saharan Africa is the demographic development. The labour force potential, which is growing strongly because of the high population growth, can only be absorbed by the creation of additional jobs”, says Florian Witt, head of the Africa department in Commerzbank’s corporate banking.

Witt remarks that this can only succeed if the depth of value added is decisively increased – and that, specifically, prevailing conditions call for such an increase mainly in the commodity-processing industry and in the processing of agricultural products.

The signs point to a sustained positive development: “In the larger cities a middle class is forming with a demand for increasingly higher-quality products. The services sector and in particular finance will also benefit from this”, adds Rainer Schaefer, head of Commerzbank’s Country Risk Analysis and one of the authors of the study.

Schaefer expects both the development of the infrastructure and housing construction to give the building industry special momentum, and sees opportunities above all in renewable energies, as well as in information and communication technology.

However, in addition to the pleasing developments the study also reveals a whole series of negative aspects. For instance, in some Sub-Saharan states – such as Sudan and Somalia – civil war and economic chaos still prevail. Moreover, bureaucratic obstacles and corruption often curb economic development.

For investors looking to gain exposure to Africa there are a number of ETFs to choose from:

Broad Africa

DB X-tracker MSCI EFM Africa Top 50 Index ETF (XMAF) (EFM stands for Emerging and Frontier Markets)
Provides exposure to South Africa, Nigeria and Egypt. Financials account for 37.43%, Materials 13.19%, Consumer Staples 12.43%, Consumer Discretionary 10.28%, Industrials 10.10%, Telecommunications 9.42%, Energy 4.98% and Healthcare 2.18%. Major holdings include Zenith Bank, Nigerian Breweries, Commercial Intentional Bank, Orascom Construction Industries, Sasol, Naspers, MTN Group, GT Bank, Standard Bank, and Orascom Telecom Holdings. London listed. TER 0.65%.

Van Eck Market Vectors Africa Index ETF (NYSE: AFK)
Provides exposure to companies that are headquartered in Africa or that generate the majority of their revenues in Africa; includes companies listed in South Africa, Nigeria, Morocco, Egypt and Kenya.  NYSE Arca listed. TER 0.78%

Note to UK investors: The Market Vectors Africa Index ETF has been registered with HM Revenue & Customs’ UK Fund Reporting regime, meaning it is taxed similar to a UK onshore fund.

RBS MSCI Emerging and Frontier Markets Africa ex South Africa ETF (M9SZ)
Provides exposure to Egypt, Nigeria, Morocco, Kenya, Tunisia and Mauritius.
Despite the Xetra listing, the fund is eligible for ISAs and SIPPs and is in the process of obtaining Fund Reporting Status. Xetra listed. TER 0.85%.

South Africa

South Africa is a great way to gain exposure to the whole of Africa as many of its companies are active in countries right across the continent.

HSBC MSCI South Africa ETF (HZAD)
London listed. TER 0.60%

Lyxor South Africa (FTSE/JSE Africa Top 40) ETF (LSAF)
London listed. TER 0.65%

Credit Suisse MSCI South Africa ETF (CZA1)
London listed. TER 0.65%

iShares MSCI South Africa ETF (SRSA)
London listed. TER 0.74%

RBS Market Access FTSE/JSE Africa Top 40 Index ETF (M9SK)
Xetra listed. TER 0.65%

Selected others:

Standard Bank Africa Equity Index ETN (SBAEI)
Provides exposure to a diversified basket of shares across 28 African counties as such providing access to Africa as an asset. Stocks selected include listed stocks within Africa, and stocks listed on major international exchanges that have direct exposure to Africa through either revenue, profits or asset streams. JSE listed.

Standard Bank Africa Commodity Index ETN (SBACI)
Provides exposure to a diversified and weighted basket of commodities including Aluminium, Copper, Crude Oil, Gold, Platinum, Corn and Wheat. The index represents a passive index which is re-balanced every 2 months in line with the commodity weighting for the index, while the commodity weighting is determined annually. The individual commodity weightings are calculated on the basis of their average African production value for the most recent five year period. JSE listed.


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