The International Monetary Fund just released its latest World Economic Outlook report. Given another cut to global economic growth projections, you might be tempted to pour your money into one of the least-developed and fastest-growing economies in the world: Africa. But even if you're ready to invest in Africa, Africa might not be ready for you. Here are three reasons you shouldn't invest in the world's fastest-growing economy.
1. Lack of institutions
We take a lot for granted in the U.S., and much of what we enjoy daily is based on a social structure afforded to us by our government. On the physical front, that means things like hospitals, schools, and security forces. And on the social side, that means freedom of speech, media, and a justice system.
Businesses need public institutions to function. Every decision balances risk and reward, and institutions reduce risk by guaranteeing some ground rules. In many parts of Africa, there's no guarantee of any of the amenities that create and support a workforce: a decent education, affordable health care, and labor law. On the infrastructure side, a washed-out road may take months to fix, power outages are a day-to-day norm, and crony politicians can come knocking anytime to ask for their next handout.
Africa may have plenty of reward ahead, but its lack of institutions rockets risk to untenable levels.
2. Cartographic clashes
Unfortunately, investing risks in Africa aren't contained to specific countries. Major geopolitical concerns can be traced back to colonial days, when European cartographers carved up the country along clean-cut lines and geographic features, instead of along tribal boundaries.
That lack of cultural unity has translated into deep-rooted revolutions and an absence of national identity. Given tight water and food supplies in many parts of Africa, as well as lucrative natural resources in other areas, countries have had a hard time keeping things together.
The examples are as numerous as they are depressing. The Rwandan genocide, the War in Darfur, the ongoing Mali conflict, and even the recent Ebola outbreak across West Africa all point to fractious and fragile states divided by ethnicity, religion, and resources.
3. You couldn't if you wanted to
Intercontinental Exchange (NYSE:ICE), the corporation that runs the New York Stock Exchange and 10 others, has more than 12,000 listed companies on its roster. By contrast, the Ghana Stock Exchange grabbed 37, the Uganda Securities Exchange has 18, and the Seychelles is stuck with four.
But still worse than the scarcity of companies to throw cash at is the accompanying lack of information and accountability. The U.S. Securities and Exchange Commission gets a lot of flak, but its oversight ensures that we (usually) know what we're investing in. If an African corporation isn't listed on a U.S. exchange, it can do a lot of book-cooking.
Likewise, even country-level indicators can be way off. Nigeria's 2013 nominal GDP level was recently revised upward by more than 80%. That's a huge change to any investing thesis, and even more so on a continent with some of the most volatile currencies in the world.
Are we there yet?
Africa is a huge and diverse continent. But the three reasons listed above are unfortunately endemic in every nation. Even semi-industrialized countries like South Africa and Kenya can't offer the stability an investor needs to balance the risk-to-reward trade-off. There may be future investing opportunities in this increasingly emerging continent, but they're not here yet.
Invest in America
For better or worse, Africa simply isn't ready for the individual investor. The investing thesis doesn't stack up, and there are too many unknowns. For both novice and seasoned investors, some of the best stocks are the ones close to home.
Justin Loiseau has no position in any stocks mentioned. The Motley Fool recommends IntercontinentalExchange. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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