David Kuo: Africa need not be a dark continent for small shareholders

Investment Insider

Africa has been described as the final frontier for investors.

That's because as a mass of land, it has been largely untouched from an investment perspective. But just because it has been untouched, it does not mean it is untouchable.

It is not really too difficult to make a case for Africa given that many of its economies have restructured since the early 1990s. The currencies have been more stable and inflation in the main is more acceptable. Additionally, the income of many African nationals has been rising steadily. This has led to significant investment in infrastructure and growth in the telecommunications industries.

However, there is still a lot of work to be done, which could be good news for private investors. Mobile phone penetration, for example, is still significantly below the saturation levels of the developed world.

Africa is also rich in natural resources such as oil and metals, which could prove very beneficial in the longer term. It has the world's biggest untapped resource of copper and it is also well endowed with other commodities. There is gold in South Africa, which also owns 80 per cent of the world's platinum. Nigeria, is awash with black gold, currently producing two million barrels of oil a day and Ghana has produced oil for the first time.

In terms of politics, there has been a shift away from dictatorships, but they haven't disappeared entirely, so investors need to be alert to the dangers. The uprisings in Libya, Tunisia and Syria had a detrimental effect on investors last year and the revolt in Egypt caused a 30 per cent drop in the value of shares. So investors should factor in a higher risk premium.

It is not easy to buy African shares directly. Apart from the Johannesburg Stock Exchange, the stock markets are small and illiquid. Nevertheless, it is possible to construct a portfolio with significant exposure to Africa through many UK companies. These include PZ Cussons, with 40 per cent exposure, and Lonmin at 20 per cent. Lonrho, which operates across 19 countries in the sub-Saharan area does over 90 per cent of its business in Africa. Tullow Oil, which is listed on both the London and Ghana stock exchanges, generates almost all of its profits there.

You can also buy African companies through their Global Depository Receipts. These are not shares as such, but certificates representing ownership of the underlying shares. Examples include Nigeria's Guaranty Trust Bank and Zenith Bank.

Investment is also possible through trusts such as the AIM-listed Africa Opportunity Fund and also the PME African Infrastructure Opportunities that is listed on the London Stock Exchange. There are also exchange traded funds such as Lyxor ETF South Africa that tracks the FTSE/JSE Top 40 index.

Investing in Africa probably makes sense if you already have a diversified portfolio. It is not for the faint-hearted, but as Jim Rogers once said: It is better to invest in a region that is bad but moving in the right direction than in developed countries that are past their peak.

David Kuo is director of financial advice website fool.co.uk