As continents go, Africa has the most untapped potential. It has more than 1 billion people and the world's fastest-growing population, abundant natural resources, arable land, accessible coasts and a myriad of other advantages. Yet Africa, for a variety of reasons, has yet to capitalize on these possibilities. With the entire globe now watching the South Africa's World Cup tournament, the first ever held on the continent, many observers wonder whether this is the beginning of a new era for the region. If so, how might investors profit from that progress?
A troubled land
Africa's problems are well-known. They include crime, corruption, extreme poverty, disease, and exploitation. Even in South Africa, these problems are prevalent. The life expectancy in the country is just 49.2 years, placing it among the bottom 10 in the world in that category, with 18% of the adult population there today infected with HIV. Half of the population lives below the poverty line, and the unemployment rate in the country last year checked in at 24%.
And this is Africa's largest, most developed economy.
These issues are exacerbated by corruption in government and violence in society. South Africa, for example, ranked 55 out of 180 on Transparency International's Corruption Perception Index in 2009, while Nigeria, Africa's second-largest economy, ranked 130. In terms of crime, Southern Africa leads the world in intentional homicides, with more than 37 per 100,000 people. No matter how you slice it, these statistics don't paint a picture of great places to live or work.
But you knew that already
Given those circumstances, economies that are largely dependent on natural resources, and governments that tend to be either unstable or unfriendly to business, how can corporations or investors expect to make money in Africa? As it turns out, certain companies in Africa have performed well. A recent study by McKinsey found that leading up to the global economic downturn, publicly traded companies operating in Africa earned on average a return on capital that was "two-thirds higher than that of comparable companies in China, India, Indonesia, and Vietnam." While economies in Africa have subsequently suffered from the decline in commodity prices, it's clear that the potential exists in Africa for investors to make money.
A number of companies operating in Africa are finding innovative ways to do just that. Telecommunications company Millicom International Cellular
All is not gumdrops and gravy
Even Millicom, by all accounts a success story, has encountered some "issues" along the way. I wrote previously about the Senegalese government's attempt to extort some $200 million from the company under the guise of a license renegotiation. The company also needs to make sure its towers are equipped with mobile generators and staffed by guards, since electricity and security on the continent is often unavailable or unreliable.
And then there's the case of Net1 UEPS
Buyer beware -- and diversify
These are the realities of operating risk facing companies doing business in Africa today. Combine them with a stretched valuation, as in Millicom's case, and there's not really a good reason to get involved, even though it's well-run and benefitting from extensive local knowledge. In fact, unless the price is that compelling (the reason I own and have recommended Net1 shares despite the clear political risk), I would be hesitant about buying or recommending any single company focused on Africa.
Yet Africa's broader growth opportunity remains apparent. In making the case for Africa in a recent article, economist Paul Collier revealed that while countries in the "long-explored" developed world have around $114,000 of known subsoil assets per square kilometer, Africa has just $23,000. That discrepancy is not caused by a lack of resources, but rather by a lack of exploration. As resource-hungry countries such as China pour money into the region to discover those resources, we should expect significant benefits for African economies and peoples (provided, of course, that current African governments don't embezzle it all). And that's not all that Africa has that the world wants. Arable land and cheap labor are two other valuable assets that the rest of the world needs, and is rapidly exhausting.
So how can one capture a larger growth story for his or her portfolio, while minimizing political and operating risk? The answer, of course, lies in broad diversification. Thanks to ETFs, that strategy has never been easier for individual investors to implement.
When it comes to Africa, our pick at Global Gains is Market Vectors Africa
While Africa's long-term growth trajectory looks promising, there will be volatility along the way. Capture that upside and protect yourself against volatility by diversifying across countries and companies via Market Vectors Africa.
Tim Hanson is co-advisor of Motley Fool Global Gains. He owns shares of Net1 UEPS. Coca-Cola is a Motley Fool Inside Value choice. Net 1 Ueps Technologies is a Motley Fool Rule Breakers selection. Sasol and Net 1 Ueps Technologies are Motley Fool Global Gains recommendations. Coca-Cola and Sasol are Motley Fool Income Investor picks. The Fool owns shares of Coca-Cola. The Fool's disclosure policy picks Argentina to win this year's World Cup.