Investors in emerging markets tend to mostly focus on Asia and Latin America, while giving short shrift to Africa. But it may be time to pay more attention to this region of 1.2 billion people because an economic transformation is underway on the backs of a fast-growing middle class.
Just a few years ago middle-class Africans faced local limited shopping options, notes the Harvard Business Review (HBR). “Now, branded items—from luxury cosmetics to fast food and fashion—are becoming widely available at the glittering new shopping malls scattered around the region’s fast-growing cities,” HBR wrote, noting that African consumer spending has risen from $470 billion in 2000 to a recent $1.1 trillion.
And the various African governments are working to give businesses a boost. Larry Seruma, chief investment officer at the Nile Funds, says that spending on infrastructure is much higher than it was a decade ago. “From Cairo to Cape Town, infrastructure used to account for 5 percent to 10 percent of R&D budgets,” he says, adding that such investments now range from 15 percent to 30 percent of annual budgets.
Seruma manages the Nile Africa, Frontier & Emerging Fund (NAFAX). The fact that it is the only “pure play” mutual fund on sub-Saharan Africa but has just $14 million in assets, speaks to subdued level of investor interest in Africa. Then again, the fund’s high 2.5 percent annual expense ratio and roughly 7 percent negative annual returns over the past three years could also be reasons.
Much of the underperformance can be chalked up to weakness in the South Africa and Nigerian economies. However, both of them have recently turned the corner. The South African economy grew 2.5 percent in the second quarter (following a first quarter contraction). And the Nigerian economy grew 0.6 percent after five straight quarters of contraction.
Oliver Bell, portfolio manager of the T. Rowe Price Africa & Middle East Fund (TRAMX), thinks that Africa “is likely at the bottom of the cycle and now showing tentative signs of life. Not many people are yet talking about this upturn, and valuations remain cheap,” he says.
The T. Rowe Price fund has a nearly split weighting in Africa and the Middle East. The fund, with $146 million in assets and a 1.56 percent expense ratio, has fared better than the more narrowly focused Nile Funds' offering, slipping an average of 3.6 percent annually over the past three years.
Yet markets appear to be taking note of the above-cited economic snapback. The T. Rowe Price fund, for example, is up 18 percent over the past 12 months while the NAFAX product from Nile Funds is up 8 percent during that time.
You’ll find those kinds of returns as well among the Africa-focused ETFs. The VanEck Vectors Africa Index ETF (AFK) has rebounded 20 percent in the past 12 months, after a prior period of weakness. The underlying index focuses on companies that are incorporated in Africa, listed on a local stock exchange, or derive more than half of their sales from the continent.
More than half this ETFs’ assets are controlled by the financial or raw materials sectors. Still, reflecting a growing middle class, consumer, telecom and real estate stocks make up nearly 40 percent of the VanEck ETF, which sports a net expense ratio of 0.79 percent.