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Africa: The Last Investment Frontier

If you are the adventurous sort and happen to find yourself strolling the streets of Tripoli, Libya, you might smell the familiar aroma of cinnamon buns baking. U.S. bakery chain Cinnabon opened a new café in downtown Tripoli, making it the first American franchise to set up shop in the country.

You can bet that more will be following.

With many of the traditional East Asian and Latin American emerging markets now comfortably developed into middle-income nations, investors and entrepreneurs are shifting their attention to the next big growth market — Africa.

In a year in which growth forecasts have been slashed across the globe, Africa has been surprisingly resilient. Meanwhile, the IMF forecasts that Africa’s growth rate will be 5.4% this year and 5.3% in 2013. For a continent best known for its chronic civil wars and HIV epidemic, that’s not half-bad.

The African continent has a population of more than a billion people, making the continent bigger than the United States and European Union combined. But before we get too excited, we should remember that the entire lot of them are not exactly queuing up to buy iPads and frappucinos. The World Bank estimates that 47% of Sub-Saharan Africans live on less than $1.25 per day.

But before you write Africa off as being too poor to be worthy of consideration, consider that India — which has been a favorite emerging-market destination for investors for years — has nearly comparable levels of poverty. The World Bank estimates that 36% of South Asians live on less than $1.25 per day. And we also should remember that China had similar levels of poverty just a few decades ago.

Investors looking to invest in Africa can go about it a couple different ways.

The iShares MSCI South Africa ETF (NYSE:EZA) is one popular option, though this ETF is concentrated in one country — South Africa — and in the mining industry, which is notorious volatile and a poor proxy for rising African incomes. However, its top holding is in telecom MTN Group Ltd. (PINK:MTNOY), and energy and chemicals firm Sasol (NYSE:SSL) also enjoys a hefty weighting.

The Market Vectors Africa Index ETF (NYSE:AFK) is a more diversified option in that its mandate covers the entire continent, though it is a little too heavily allocated to the banking sector for my liking. AFK has more than 40% of its assets in financials. I would prefer to see larger allocations to consumer-focused companies such as Nigerian Breweries or Maroc Telecom.

Perhaps the best way to get access to Africa is via the shares of high-quality Western firms actively engaged there.

A fine example would be British high-end spirits group Diageo (NYSE:DEO). I highlighted Diageo’s booming whisky sales in Africa last year, as well as its massive expansion expenditures this year, and the company continues to be one of my very favorite ways to get “back door” exposure to emerging markets.

Another option would be SABMiller (PINK:SBMRY), which is the second-largest beer brewer in the world. SABMiller gets roughly a third of its profits from Africa, and that number should only grow with time.

As a note of caution: The U.S. ADR shares for SABMiller are thinly traded, so make sure you use a limit order. Investors with access to foreign markets may prefer to buy the London-traded shares.

Charles Lewis Sizemore, CFA, is the editor of the Sizemore Investment Letter, and the chief investment officer of investments firm Sizemore Capital Management. As of this writing, Sizemore Capital was long DEO. Sign up for a FREE copy of his new special report: “Top 3 ETFs for Dividend-Hungry Investors.”

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