Africa's economy is getting a lot of upbeat coverage these days, no doubt intriguing investors who are looking for the next big thing in emerging markets.
But even as Africa shows increasing promise, most investors will find their options limited to the point where it remains more of a spectacle than a realistic money-maker.
Mohamed El-Erian, best known as the chief executive of Pacific Investment Management Co. LLC, the $2-trillion (U.S.) asset manager, gushed over Africa in the latest issue of Foreign Policy.
He argued that the region is moving beyond its reputation as an operations base for multinational commodity producers and is now seeing economic diversification in the form of homegrown small-and medium-sized enterprises.
The World Bank, he noted, reckons that these firms add 20 per cent to Africa's gross domestic product and generate some 50 per cent of new jobs in sub-Saharan Africa.
"These successful businesses are giving rise to internationally competitive companies, thereby providing access to global markets, new business models and technologies, and higher wages and salaries," Mr. El-Erian said in the article.
Earlier this month, The Economist also championed Africa, pointing to GDP growth rates of more than 5 per cent over the past consecutive three years. Over the past decade, six of the 10 fastest-growing economies in the world have been African. It is home to a youthful population, too, which will give it a larger workforce than China in 30 years.
African stock markets are reflecting this optimism, particularly since the start of 2012. Kenya's benchmark index has risen 49 per cent, Nigeria's has risen 60 per cent and Ghana's has risen 86 per cent.
However, as tantalizing as these gains are and as persuasive as the pro-Africa argument is, there is a big problem with Africa from the perspective of the small investor. Like, how do you get access to the region?
The answer isn't as straightforward as it might seem. Africa's capital markets are fragmented and tiny. Within the Nigerian Stock Exchange All Share Index, Dangote Cement PLC and Nigerian Breweries PLC dominate with a combined 40 per cent weighting. Yet, their combined market capitalizations are a modest $24.5-billion.
Beyond them, market caps are small, making it difficult for mutual fund managers and other well-heeled institutional investors to move in without causing market disturbances.
Indeed, there is no African-focused mutual fund available to Canadian investors.
Individual stock ownership is also difficult, given that few names trade on U.S. exchanges as American depositary receipts. Those that do are generally limited to South African resource companies, which aren't the best-suited plays on rising African economies.
That leaves exchange-traded funds, or baskets of stocks that track indexes and trade on exchanges throughout the day. However, they haven't been able to capture Africa's rise.
The Market Vectors Africa Index has risen 13 per cent since the start of 2012, half the gain of the S&P 500 over the same period. The SPDR Emerging Middle East and Africa ETF has risen 10 per cent. The iShares MSCI Frontier 100 index fund, less than eight months old, has gained 16 per cent since inception.
If China serves as an example to investors, then the best investments could easily be developed-world companies that expand into Africa to tap the discretionary spending of emerging consumers.
After all, Yum Brands Inc., McDonald's Corp. and Starbucks Corp. have been among the best plays on the rise of China – and their share price gains have certainly demolished the returns on the Shanghai Stock Exchange composite index of Chinese companies over the past five-year and 10-year periods.
In the case of Africa, though, this type of consumer is only just stirring. The region is showing every sign of rising in economic importance. But small investors hoping to get a piece of its future will have to wait.
David Berman