African Stocks: Investing in the Last Great Emerging Market
A massive middle class and rapid technology-enabled development could turn African stocks into growth darlings over the next two decades.
China is done.
OK, OK. That might be a little over the top. Perhaps we could say that China's time as the world's greatest growth darling is done. So if you want access to emerging market stocks with blistering "China-like" economic growth, African stocks are the last great investing frontier.
That might sound ridiculous at first. But then, in 1978, when China first began its economic reforms, it might have seemed ridiculous to believe that China would grow to become the world's second largest economy a generation later. And yet, here we are!
Africa is developing a real middle class for the first time in its history. By some estimates, Africa's middle class is already well more than 300 million people. More conservative estimates put the number closer to 170 million people. But we don't need to split hairs: Even at the lower end of the estimate, we're talking about a lot of consumers.
Of course, "middle class" in Africa might mean something very different than middle class in suburban New Jersey. Africa is a frontier market in the truest sense of the word, and much of the continent is at a very low level of development. But that's exactly what makes Africa exciting. It's a lot easier to grow at China-like rates when you're effectively starting at zero.
Technology is also allowing developing countries to skip entire levels of development. Much of Africa will never have wired internet, let alone wired phones. It's vastly cheaper and quicker to throw up cell towers, so that's the direction they'll go. And they'll have none of the cost of maintaining legacy infrastructure.
Think about banking and finance. You likely take your bank account for granted. But only about a third of Africans have access to formal bank accounts. This creates massive opportunities for disruptive fintech operators to step in and eliminate the need for a bank account altogether. If your first experience with payments was something that looked like PayPal, Venmo or Apple Pay, and that became the norm … why would you ever bother with a bank?
These are the kinds of opportunities that are alive and well in Africa. Today, we're going to look at three of the best African stocks (and two funds!) that will take advantage of them.
Data is as of April 13.
- Market value: $23.2 billion
We might not normally think of Africa as a major technology and innovation hub. And frankly, it might be a long time before the country develops widespread precision manufacturing. That infrastructure simply isn't there yet.
But the beauty of modern tech startups is that many of them don't require major infrastructure investment. Scroll through the apps on your iPhone. How many were thrown together by a skeleton crew at a startup?
This brings us to what is, without a doubt, the greatest success story among African stocks: technology group Naspers (NPSNY, $21.64).
Naspers has a history dating back to 1915, when it was founded in South Africa as publishing company. The company certainly changed with the times, getting into paid TV in the 1980s and into internet-related businesses in the 1990s. And in the decades that have passed, it has evolved into one of the largest tech startup investors in the world.
Naspers earned billions for its shareholders by being an early investor in Chinese internet giant Tencent (TCEHY), and today, via its subsidiary Prosus, the company invests in a host of up-and-coming tech startups in the travel, fintech and food delivery industries, among others.
Naspers also owns Takealot, South Africa's largest e-commerce retailer. Call it the "Amazon of Africa," if you will.
If there is one criticism of Naspers it might be that, despite being an African stock, it's not a pure play on Africa given the global nature of its portfolio. But we can be pretty sure the company's investors don't mind.
- Market value: $21.6 billion
There is nothing more fundamental to modern living than a smartphone. Texting, finding directions, hailing a car, paying a bill, reading the news, ordering a pizza, trading stocks – having even an entry-level smartphone makes all of these things vastly easier and more efficient.
This brings us to MTN Group (MTNOY, $12.01), Africa's homegrown telecom giant. MTN is Africa's largest mobile network operator with more than 270 million customers in 19 markets across Africa and the Middle East.
As Africa's population grows wealthier, they will consume more data and mobile services. This is a given. And if that was all there was to the story, it would be enough to make MTNOY an interesting growth play. But MTN Group is one of the best African stocks to buy because there's more to the company than just utility cell phone service.
MTN is also active in fintech and mobile financial services. Via its MoMo Pay fintech flatform, MTN offers in-store payments, remittances, prepaid services, mobile wallets, micro-loans and micro-insurance, among other services.
Yes, the cashless economy has made it even to Africa, and MTN is one of the major players delivering it.
- Market value: $16.4 billion
Let's step away from technology-centric African stocks for a minute and get a little more gritty.
Based in South Africa, Sasol (SSL, $25.77) is a global chemicals and energy company with a presence in 23 countries and more than seven decades of history.
Sasol's energy business manages the marketing and sales of its oil, gas and electricity products in southern Africa and its international gas to liquids ventures in Qatar and Nigeria.
Meanwhile, its chemicals business has the lofty goal of "innovating for a better world" with a portfolio of specialty and commodity chemicals used across a wide range of applications and industries. The chemicals business boasts customers from 120 countries.
Sasol clearly isn't as sexy as MTN or Naspers. But a growing economy requires basic building blocks, and those blocks include energy and chemicals.
You might not want SSL in your backyard, but having it in your portfolio might be a great long-term move.
Global X MSCI Nigeria ETF
- Assets under management: $44.7 million
- Expenses: 0.91%, or $91 annually for every $10,000 invested
Any list of the best African stocks is going to be heavily weighted to South Africa – which is where MTN Group, Naspers and Sasol are all domiciled. It's the most developed country in the region, and it's a big enough player in the global space to have made it into the "BRICS": Brazil, Russia, India, China and South Africa.
But there's a lot more to Africa than its southernmost country. And it's the vast frontier-markets interior of the continent that offers the greatest potential for explosive growth.
One way to play that is via exchange-traded funds (ETFs) – in this case, the Global X MSCI Nigeria ETF (NGE, $9.38). Nigeria is Africa's largest country. At more than 200 million people, its population is nearly as large as the next two countries (Ethiopia and Egypt) combined.
The Nigeria ETF is fairly typical for a frontier-markets ETF in that it is dominated by banks and commodity stocks. But it's worth noting that the ETF includes Nestlé Nigeria and Nigerian breweries among its larger holdings.
You should always be careful investing in a frontier market, of course. But if you're looking for a high-octane growth play for the next couple of decades, the Nigeria ETF is a solid contender.
VanEck Africa Index ETF
- Assets under management: $63.0 million
- Expenses: 0.79%
Finally, if you're looking for a single one-stop shop for exposure to Africa, the VanEck Africa Index ETF (AFK, $21.45) is a solid choice.
AFK invests in the shares of African companies, defined here as firms that are incorporated in Africa, as well as firms incorporated outside of Africa but that have at least 50% of their revenues or related assets in Africa.
The ETF is heavily weighted to financial stocks, which make up 32% of the portfolio. But it also has a healthy allocation to basic materials and telecom with weightings of 29% and 21%, respectively. It holds the three stocks mentioned above, but also the likes of Kenyan mobile network Safaricom, Morocco's Attijariwafa Bank and British multinational miner Anglo American (NGLOY).
Emerging markets have really struggled over the past decade, and African stocks were no exception. But when EMs move, they can really move. Should they come back into favor in the decade ahead, African stocks could produce some of their most explosive returns – and AFK is an easy way to do so in a single trade.
Charles Lewis Sizemore, CFA is the Chief Investment Officer of Sizemore Capital Management LLC, a registered investment advisor based in Dallas, Texas, where he specializes in dividend-focused portfolios and in building alternative allocations with minimal correlation to the stock market.
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