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What do you think about investing in Africa ETFs

It is a huge place, with over 50 countries, and full of potential. Within our lifetimes we might see some economic superpowers in Africa.

With that being said I would be careful about investing in African ETFs for a number of reasons:

  • There is no link between stock market performance and GDP growth
  • Look at China vs India in recent years. Chinese Stocks have halved (Shanghai market I mean) since 2006. Less than halved if you have reinvested the dividends mind you. Indian equities have soared. But both have similar growth rates… which Chinese GDP growth has been a bit better overall
  • Many people think they can `country pick` - which is why so many people loved BRIC funds 5–10 years …..but how is that going for those people…..
  • With the exception of South Africa, there is no market which has been tried and tested in Africa for a long time. Many of the highly performing countries, like Ethiopia, are relatively new to this.
  • Let’s say African growth in the next 30–50 years is excellent, which it very well might be. In that case, many African firms will IPO in the US and African stocks will naturally be on MSCI World anyway
  • An Emerging Market index and World Index will have limited exposure to Africa in any case.
  • Corporate governance is an issue. In layman terns, the accounting can be dodgy. Whereas those firms that are big enough to IPO in the US or Europe….that’s a different story
  • Many locals like to invest in property and other assets
  • Most American firms (Apple, Amazon) and indeed firms on the MSCI World will increasingly sell their services in Africa, if the good GDP growth rate continues.

China should serve as a warning. The biggest reasons why China has suffered as a market, despite high GDP growth, is the overvaluation of the market in 2008 + other issues such as the IPO issue and preference for locals to invest in overseas markets and property.

At the end of the day, in a global economy, you don’t need to invest in an ETF focused on Africa, to get the benefits of African growth.

In the same way that Chinese, Russian and Indian firms and growth have pushed the US Stock Market higher, the biggest beneficiaries of African growth may be the big global players.

Reach out today! - Personal Investment Services - Adam Fayed

Some reading

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