Recently there has been talk of the emergence of smarter ways to capture beta in African markets, the major ones in question being Egypt, Nigeria, and South Africa. Here’s our take on the three largest forces we see disrupting markets in Africa for the better over the next 3 years and how to best gain exposure to them.
Higher Transparency and Reduced Risk
Blockchain technology has been around for quite some time but it has recently come into play as a driver of higher transaction transparency in Africa. By recording transactions in a format that is unchangeable, time-stamped, and able to be verified, Blockchain can help prevent corrupt transactions such as the sale of blood diamonds, voting inaccuracies, and disputes over land ownership. Decreasing political turmoil and corruption mean reduced risk for investors.
Metal and Mining
Over the last decade, China has been gradually assuming control of much of Africa’s mineral resources to fund its own economic development. In fact, in the decade between 2005 and 2015, China-owned projects in Africa increased from a negligible amount to nearly 120 (Basov, 2015).
As a result we may be ending the free market for certain metals. Chinese domination of the metal supply will mean a chronic shortage of strategically important materials such as rare earth metals which are used in defense technology. This put them in charge of price and supply of a critically important resource, and ultimately we may see China potentially becoming a stronger force geopolitically and that brings all sorts of consequences with it.
There is a proven lesson in financial history that we see repeating itself, and it involves Bitcoin. With the adoption of smart phones, Bitcoin is becoming a bigger part of daily life in Africa. As a result of having a digital currency to conduct online transactions, commerce across the continent is bound to become magnitudes more than it is today. Bitcoin transactions across borders are easier because of the lack of bank approval required as well as the elimination of the need to conduct a foreign exchange conversion. It also allows the parties to bypass any currency restrictions that a country may have put in place.
With capital now being available to economies that had been sidelined in the past from lack of access to mainstream banking, it’s likely we’ll be seeing new companies and new sources of capital markets. The universe of investment opportunities can only deepen as a result. Bitcoin may be the catalyst for active investing across the continent.
What Does All This Mean for Your Investment Strategy?
Given the disruption we’ve outlined above, where should an investor in African markets be looking? Does it make sense to pursue what the industry has deemed “smart beta” - investing to get exposure to factors such as earning quality or momentum rather than just market cap?
In our view, the best opportunities out there still reside with index funds. The market is still not deep or liquid enough to facilitated nuanced strategies. Active investing is on the horizon but we still have some way to go before liquidity required for a robust alpha strategy will be in place.
For example, let’s say you want exposure to opportunities in Nigeria, Egypt, and South Africa. Investing in ETFs that hold a variety of companies from each country provides diversification. You don’t have to worry about liquidity risk as much as you would have to if you held the position directly. For example, if you chose to structure your Egyptian exposure as a few individual stocks, the amount of money held in one particular company would potentially be much larger than holding a diversified basket through a passive ETF. Liquidity risk would be much more substantial.
Trading index funds is a very liquid way for an investor to gain exposure to African market trends. ETFs can help hedge out political risk, which is a very good thing for investors. If a company is embroiled in a political scandal it is likely to fall in value and be removed from an index causing a wave of additional selling. Perhaps passive ETFs incentivize better corporate governance>
There are many disruptive forces at work such as blockchain, Bitcoin, and Chinese ownership of metals. These are both signs and causes of improvement of the investment landscape in African markets. While Africa has come very far, we think there is still some way to go before there are opportunities for nuances strategies. We advocate for a passive investing strategy involving indexed ETFs as the best way to hedge against the political and liquidity risks that continue to prevail, albeit on the decline.
Thank you for reading my post. I regularly write about private market opportunities and trends. If you would like to read my regular posts feel free to also connect on LinkedIn, Twitter or via Atlanta Capital Group Investment Management.
Greg Silberman is the Chief Investment Officer of Atlanta Capital Group Investment Management [ACGIM]. Atlanta Capital Group Investment Management specializes in creating custom private market solutions for RIA/Family Office clients.
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Nothing in this article should be interpreted as a recommendation to buy any security. Please conduct your own due diligence.
Basov, Vladimir. (2015, Dec 15) The Chinese scramble to mine Africa. Mining.com. Retrieved from http://www.mining.com/feature-chinas-scramble-for-africa/.
This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The views and strategies described may not be suitable for all investors. It is not possible to directly invest in an index. An index fund is a type of mutual fund with a portfolio constructed to match or track the components of an index. Past performance is no guarantee of future results. Investments will fluctuate and when redeemed may be worth more or less than when originally invested. Advisory Services offered through ACG Wealth, Inc.