Sending your money to Nigeria just not in response to a scam e-mail from a deposed ruler's secret son might actually be a smart move. A growing number of Wall Street pros have been talking up Africa as the next great investment. Goldman Sachs asset-management chief Jim O'Neill, known for spotting the opportunity in Brazil, Russia, India and China and coining the term BRIC, says Africa has interesting potential. Top value investor Chuck Royce has been hunting in South Africa for companies to add to his portfolio. Walmart made a $4 billion bid to buy South Africa's Massmart.
With growth stalled in the U.S. and Europe, investors are looking at places that are poised to grow faster. Africa fits. GDP is expected to jump 4.5% this year and 5.2% in 2011, according to African Economic Outlook. The main driver is natural resources. Africa holds 40% of the world's strategic raw materials, including gold, iron ore and oil. As China and others tap into those resources, money is pouring in. Consulting firm McKinsey & Co. predicts the consumer-goods, agriculture and infrastructure sectors could more than double in the next decade, to $2.6 trillion in annual sales.
Nigeria gets investors the most excited. Goldman's O'Neill says its economy is slightly more productive than Brazil's was a decade ago. Nigeria has oil and, at nearly 155 million, Africa's largest population. Don Elefson, who has 35% of his Harding Loevner Frontier Emerging Markets fund in Africa, likes soft-drink makers, cell-phone companies and banks. "It's the industries that make inexpensive goods that make people feel nicer that will see the most exciting rise," he says.
The big question about emerging economies is always, When? Russia burned investors who got in too early. And certainly investors in Africa have to deal with political and economic risk. But Nigeria, for example, has brought down inflation and cleaned up its financial sector. Even in Zimbabwe, runaway inflation is now under control.
Shares of African firms still look cheap. Larry Seruma, who runs the Nile Pan Africa Fund, says the average African company's shares trade at a price-to-earnings multiple of 8, based on next year's earnings, compared with 15 for emerging markets overall. A number of U.S. funds invest in Africa. Among actively managed funds, Nile Pan Africa Fund, which launched in April, is the only one dedicated solely to Africa, but it's still pretty small. T. Rowe Price's Africa & Middle East Fund, which has 35% of its portfolio in Africa, boasts an expense ratio of just 1.6%, vs. 3.45% for the Pan Africa Fund. The index-like Market Vectors Africa Index ETF has risen 10% in the past year and has an expense ratio of just 0.8%. "The potential to improve in Africa is so vast that conventional investment metrics don't mean anything," says O'Neill. "If the countries' leaders get the basic things right, Africa could easily surpass any expectations."