How to Invest in Africa

Investment wisdom tells us that diversification is key. According to that principle, your investment portfolio should also be geopolitically diversified and account for as many of the world’s regions as possible.

One continent that is completely absent from many stock indices, or only enjoys a token representation, is Africa. In this guide, moneyland.ch explains how you can diversify your investments to include Africa, and what you should be aware of.

What makes Africa interesting for investors?

Some investors see a number of advantages to investing in Africa:

• A way to diversify: The African continent is barely represented in most global indexes – or is not represented at all. Targeted investments in Africa are a proven means of ironing out this imbalance, and geographically diversifying your investment portfolio.  
• High growth potential: Based on the average age of its population, African is the youngest continent on the planet. Experts believe that many regions of Africa have high growth potential.

Which stock indices track African companies?

There are several stock indices that aim to replicate the African stock market. The makeup of these indices, including the number of stocks included and the number of African countries represented, varies greatly from one index to another (see Table 1).

Table 1: Indices that track African stocks

Information as provided by corresponding service providers. Date: February 27, 2024.

All of the indices in Table 1 are price indices. That means dividends are not accounted for in performance, as they would be in a performance index.

Which ETFs can I use to invest in African stocks?

Exchange-traded funds (ETFs) make it easy to invest in an entire index, even if you only have a small amount of investment capital. These funds are passively-managed, which results in lower fees (TERs). You can buy shares in ETFs using stock brokerage accounts from banks.

However, only two ETFs that track pan-African indices are currently available to Swiss investors.

Table 2: ETFs based on African stock indices

Information as provided by corresponding service providers. Date: February 27, 2024.

Both of the ETFs in Table 2 are accumulating funds. That means dividends are reinvested directly into the fund. Both of these ETFs use swaps to synthetically replicate the index's performance. That means the fund managers involve a third party to ensure the replication of the index. The third party receives a portfolio of securities from the fund managers in exchange.

Are there other ways to invest in Africa?

Apart from the ETFs shown in Table 2, there are not many options for Swiss private investors. One of the main reasons for this is that African stocks are grossly underrepresented in most indices and ETFs. However, you do have the following options:

• Invest in national indices: Many African countries have national stock indices, comparable with Switzerland’s SMI or Germany’s DAX. Examples include the MSCI South Africa or the EGX 30 that tracks the Egyptian stock market. However, ETFs based on African national indices are not widely offered by Swiss banks.
• Invest in individual stocks: You can also invest in the stocks of individual African companies. However, the Johannesburg Stock Exchange (JSE) is the only African stock exchange that is widely available through Swiss banks. So, depending on your bank, you may only be able to invest in South African stocks. It is also important to note that investing in just a few individual stocks carries a bigger risk of loss, compared to diversifying your investment across a large number of companies.

What are the potential problems of investing in Africa?

Investing in the stock market always comes with risk. Major losses – both over the short-term and long-term – can never be ruled out, especially if your investment portfolio is not diversified.

Investing in Africa has a number of additional, unique risks and hurdles:

• Unwanted stocks from other continents: Some Africa indices include less African stocks than their titles suggest. Often, these indices include companies that do some or even a large part of their business in Africa, but are domiciled in Australia, Europe, or North America. The S&P All Africa index is an extreme example, as African companies only make up around one-third of the whole index.
• Overweighting South Africa: In many African stock indices, South Africa is heavily overrepresented in relation to its economy. The country accounts for around 16 percent of the Africa’s gross domestic product, but its weighting in most indices is much higher than that. The MSCI Emerging Frontier Markets Africa Index is an extreme example of this, as South African companies make up around 87 percent of the index. Africa indices that specifically exclude South Africa are an exception to this rule.
• High fees: Many African stock markets are less accessible and less liquid than those of many developed countries. As a result, the total expense ratios (TERs) of Africa ETFs tend to be high, as you can see in Table 2. By comparison, the cheapest ETFs that track the Swiss Market Index (SMI) have a TER of just 0.2 percent, and the cheapest MSCI World ETFs have a TER of just 0.1 percent.   
• Volatility: Investing in African countries is considered risky because parts of the continent are prone to political and economic instability. Many African countries have poor creditworthiness ratings, and gaps in the financial infrastructure make it difficult to access African capital markets.
• Currency exchange risks: African stocks are traded in foreign currencies. If the currency in which a stock is denominated loses value against the Swiss franc, the depreciation negatively impacts your real returns. The South African rand, for example, has lost a lot of value against the Swiss franc over the past 15 years.

Table 3: Actual African component of Africa stock indices

Information as provided by corresponding service providers. Date: February 27, 2024.

What are the potential returns of African stock investments?

If you compare the performance of the SGI Pan Africa Index with the global MSCI World index (see Table 4), it is clear that the Africa index has delivered poorer performance. That is partly because the euro has lost a lot of value against the Swiss franc. The SGI Pan Africa Index, which is used as the basis for the Xtrackers MSCI EFM Africa Top 50 Capped Swap UCITS ETF 1C fund, is calculated in euros.

Table 4: Comparison of MSCI World Index and SGI Pan Africa Index performance

The performance figures are based on the closing prices on February 27, 2014, February 27, 2019, and February 27, 2024. Source of performance data and currency exchange rates: Investing.com. Date: February 28, 2024.

Past performance can serve as a point of reference. But it is important to understand that past performance is not a reliable indicator of future price developments. There is no way to accurately predict returns on investments in advance.

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