by Ivan Martchev | July 21, 2010 2:49 pm
It’s no secret that the population in the developed world is generally on the decline, while the population in most emerging markets is increasing. Demographic changes drive long-term economic growth.
This is one reason why Asia is such a compelling investment destination — the region’s consumers have hit critical mass not only numbers-wise, but also by the amount of dollars they have to spend. Africa, a continent that holds so much promise due its vast natural resources, has better fertility rates than Asia, but a much lesser level of development, which limits the choices that investors have.
Looking at just the fertility data, Africa is a standout — even though only South Africa has the critical mass and a self-sustainable economic model to handle portfolio investment flows. No surprise that China has been a big investor in Africa from a foreign direct investment perspective, and their role is only likely to increase in the future.
Our favorite BRIC markets have very different demographic characteristics. Brazil has fertility rate of 2.4, Russia comes in at 1.4, India is the highest at 2.7 and China’s rate is 1.8.
In the past, China has been aggressive in family planning policies because the economic development of the country could not handle its rapidly-increasing population in the 1970s. However, as countries industrialize, fertility rates drop; I expect that the Chinese one-child policy is likely to be abandoned in the not-too-distant future.
Russia has a big demographic problem — it is shrinking notably even without family planning policies such as China’s. The country’s saving grace is that it is rich in natural resources. This natural resource wealth pulls Russia’s economy forward by way of demand from developing countries with higher fertility rates. Canada and Australia also have demographic problems similar to Russia, but they are desired destinations for educated immigrants and have similar natural resource-driven economies, which offsets the unfavorable demographics.
While there are numerous ADRs to play the BRIC boom, there are very few ways to play Africa — the so-called “frontier” markets, which are likely to be the next emerging markets. Naturally, South Africa is the gateway to sub-Saharan Africa and its companies dominate the regional markets — whether in telecommunications, financial services or other products. Many South African companies are plays on Africa at large.
South Africa’s MTN Group (OTC: MTNOY[1]) aims to be the leader in cellular telecommunications on the continent with operations in most major sub-Saharan markets. It even has reaches in such politically-difficult jurisdictions like Syria, Iran and Afghanistan — if there is an opportunity in an emerging market, MTN’s management is willing to take it. Those spectacular demographic rates and the company’s first-mover advantage in many African markets mean that the room for growth for more than one decade is pretty much assured; MTN is firmly in the leadership position here.
The company is shifting its strategy to return more cash to shareholders after several deals outside of its core markets failed to close. Africa has great demographics, but relatively poor mobile customers — so the company was reaching for growth in India and Egypt. Still, as the African continent develops, this is a clear beneficiary.
For another way to play the region, there is only one ETF that covers the frontier markers outside of South Africa — the Market Vectors Africa Index ETF (NYSE: AFK[2]). All the ETF constituents are either headquartered in Africa or generate the majority of their revenues there. The ETF consists of a diversified group of 50 companies with market caps exceeding $200 million and a three-month average daily turnover greater than $1 million that are traded on a recognized domestic or international stock exchange.
Naturally, South Africa-based companies comprise 28.6% of the ETF and offshore companies — not domiciled in Africa, but doing most of their business there — make up 19.1%. Then there is Egypt (19.1%), Nigeria (18.5%), and Morocco (12.3%).
Sector-wise, the most heavily weighted sectors in the ETF are banks (31.0%), basic resources (18.5%), telecommunications (12.0%) and oil & gas (9.2%). This is a nice broad ETF that covers the most promising markets on the African continent. It may be the only choice to play the rest of Africa, but it sure is worth it.
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