12 Reasons to Invest in Africa

Over the past decade, South Africa outperformed the MSCI Emerging Markets Index.


Profitable companies. There are a number of well-known companies that are based in Africa, including South African Breweries (a subsidiary of SABMiller) and telecom company MTN. Africa's total stock market capitalization now exceeds $1 trillion. A recent study by two economists, Paul Collier and Jean-Louis Warnholz, found that from 2002 to 2007, the average annual return on capital of African companies was 65 percent to 70 percent higher than that of comparable companies in China, India, Indonesia, and Vietnam. That means the African companies were more profitable.

[See 7 Great Dividend Funds.]

Demand for commodities. "It's mainly driven by [the] BRICs," Seruma says. "As they industrialize, they're going to be demanding more and more of these commodities." For instance, 10 percent of the world's oil reserves and 40 percent of the world's proven gold reserves are found in Africa, according to Seruma.

Increasingly less violent. According to Freedom House, 63 percent of Africa's population now lives in countries designated "free or partially free." Compare that with Asia, which has a score of 66 percent. Seruma says most African countries now have functioning democracies. "It's a very different picture from what it was 20 years ago, and that has increased investment," he says.

China's involvement in the region. Seruma singles out China because many Chinese companies—some of which are backed by the government—have made significant investments in Africa. "They are really taking a long-term view about investing in Africa," he says. The governments of countries like China have realized that they're going to need resources from the African continent to fund their growth and consumption in the future, Seruma says.

[See 3 Ways to Invest in China's Powerhouse Economy.]

Infrastructure spending. Countries are no longer coming to Africa solely to extract resources. They're beginning to stay and help make important infrastructure improvements in the continent, Seruma says. "The old story of investment in Africa was 'let us get the natural resources out of the ground and immediately ship it out,'" Seruma says. "Now it's changing. Not only do they go to Africa and make an investment in Africa, but they're also making the additional development projects." For instance, diamond giant De Beers recently signed a deal to mine diamonds in Botswana, including a commitment to build a diamond sorting facility.

Low debt. Concerns about sovereign debt—the debt that governments owe—has made headlines in Europe. Countries like Greece, Portugal, and most recently, Ireland have seen their debt downgraded by ratings agencies like Standard & Poor's. The United States also faces a huge budget deficit. Seruma says he believes that the United States will see five or six more years of low interest rates, which will lead many investors to look to different regions of the world for higher yield. "The capital being pushed out of the developed markets is going to benefit Africa," he says. "We believe this time around, there is some sustainability in terms of capital flows." Many African countries don't have the same worries. Seruma cites Nigeria, which has a debt-to-GDP ratio of only 18 percent, compared with countries like Greece and Japan whose debt-to-GDP ratio is more than 100 percent.

[See 10 Ways the European Debt Crisis Affects Your Investments.]

Growing investment from abroad. Seruma also cites a United Nations Conference on Trade and Development report, which shows that capital flows to Africa are higher than three of the four BRIC countries. Africa is ahead of Brazil, India, and Russia. It's second only to China.

Attractive valuations. Seruma believes that many African countries are currently trading at attractive valuations. He says the average price-to-earnings ratio for African companies is about 8 to 9 percent compared with the S&P 500, which has an average P/E ratio of about 15 or 16 percent. "There's a huge valuation differential that is not explained by the risk," he says.