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AFK: Best Vehicle At The Moment

Trending 1 year ago
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Overview

Africa is simply a difficult region for US investors to access, arsenic location are much accessible options listed successful markets for illustration Asia, Europe, and Latin America. The VanEck Vectors Africa Index (NYSEARCA:AFK), which is down astir 50% during nan past decade, is apt 1 of nan champion vehicles for US investors to consider. The main logic I americium hesitant astir Africa is that astir ETFs person a larger magnitude of their assets invested successful banking and/or mining companies, and location are not galore user axenic plays. Africa will besides struggle arsenic nutrient and power prices stay high, and maturation is still beneath humanities norms. Valuations are not astatine an awesome low, and location is arguably overmuch much worth successful markets for illustration Latin America, wherever nan risk-reward floor plan is overmuch much attractive. This ETF invests successful aggregate countries, and I americium astir optimistic astir Egypt, which is my favourite pick among MENA ( Middle East North Africa) equities. I americium assigning this ETF arsenic a hold, arsenic I whitethorn accumulate it successful 2023-2024 alternatively of making bets connected immoderate of nan ETF's constituents for illustration Nigeria aliases South Africa.

Africa’s Outlook

Africa’s economical maturation whitethorn diminution from 4.1% successful 2022 to 3.8% successful 2023, which is good beneath nan maturation successful years for illustration 2016 ( supra 5%). Major African equities that are a portion of nan MSCI frontier and emerging marketplace indexes are not highly cheap, fixed these macro and governmental risks that are ahead. This is 1 of galore reasons why I for illustration markets for illustration Brazil, Chile, and Colombia, each of which waste and acquisition astatine a discount to these African equities.

Inflation will besides beryllium a immense root of concern, arsenic nutrient prices roseate by over 20% betwixt 2020-2022, nan astir since nan GFC. This is exacerbated by nan truth that Africa is simply a nett nutrient importer, and low-income consumers person been deed difficult by nutrient and power inflation. Inflation successful Sub-Saharan Africa averaged 14.5% successful 2022, and should only diminution somewhat successful nan coming years.

Inflation has besides mostly impacted nan mining sector, a cardinal portion of Africa’s economy. Many of nan companies successful this ETF are mining companies. Total mining volumes successful South Africa fell by 8% owed to nan power situation successful nan country. South Africa’s image to foreign investors has besides substantially declined owed to issues successful nan mining industry. The mining assemblage contributes to astir 10% of Sub-Saharan Africa’s GDP.

Some banks successful Africa whitethorn beryllium capable to fare good owed to maturation picking up and Central banks hiking rates. The ROE of African banks dropped by 50% to 7% during 2020 and is slow starting to bounce back.

Mckinssey

McKinsey

Around 50% of Africa's organization still remains unbanked, truthful I deliberation this would beryllium 1 of nan champion industries to stake on.

ETF Country Weighting

The main rumor to see pinch this ETF is that astir half of nan assets are invested successful South Africa and Nigeria. Some of nan top, high-growth economies successful this region, for illustration Kenya aliases Tanzania for example, correspond a mini % of nan ETF’s assets. Since Kenya, Morocco, Tanzania, and different African frontier markets do not person listed ETFs, it is much difficult to afloat entree Africa erstwhile constricted to US exchanges.

Vaneck

VanEck

Within these apical 10 countries, I americium astir bullish connected Egypt, which is trading astatine distressed levels and has underperformed nan VanEck Africa ETF during nan past decade, aft substantially outperforming anterior to 2016.

ChartData by YCharts

Investors who want to stake connected banks that tin use successful nan region because of nan ample unbanked organization tin attraction connected stocks for illustration Commercial International Bank Egypt (OTCQX:CIBEY) arsenic well. This banal is still trading good beneath its pre-covid highs.

ChartData by YCharts

The Global X MSCI Nigeria ETF (NGE) has besides substantially underperformed African equities and emerging markets during nan past decade.

ChartData by YCharts

I person decided to clasp disconnected connected Nigeria aft covering nan market past year, arsenic lipid accumulation did not bounce backmost accelerated capable (still missed OPEC quotas) and nan state is depleting overseas speech reserves, which puts nan state astatine risk.

Trends

Mobile Payments: One of nan astir absorbing trends successful Africa is really consumers tin leapfrog accepted technology, successful areas for illustration banking, and clasp integer products for illustration mobile banking. Safaricom, which is listed successful Kenya and 1 of this ETF's apical holdings, is 1 successful lawsuit to follow, arsenic it has been capable to seizure nan maturation of mobile payments successful Africa.

Safaricom's Mpesa Revenue

Statista

Statista

Companies for illustration this, and different user themes, are spearheading maturation successful Africa. However, astir 65% of nan ETF’s assets are invested successful financials, materials, and power companies, which typically waste and acquisition astatine a discount to nan wide index. As of nan extremity of January 2023, this ETF traded astatine 8.8x net and 1.7x book, which is reasonably valued, but not that completing because of nan industries it invests in.

Tourism Recovery: Select frontier and emerging markets could guidelines to use from accrued tourism arrivals. This is particularly existent for Egypt, which is opening to acquisition a rebound successful tourer arrivals. Morocco is 1 of nan starring destinations for visitors who are walking to Africa.

International Tourist Arrivals ( millions)

Statista

Statista

Tourism maturation should use immoderate of nan largest countries this ETF invests in, including South Africa, Egypt, and Morocco.

ETF Final Thoughts

This ETF is 1 of nan easiest ways to summation entree to Africa, if you are consenting to put successful mining/banking companies, and put a batch successful South Africa and Nigeria.

However, Africa is not very good positioned to use from commodities, arsenic Nigeria's system is still struggling, and consumers successful different countries will struggle owed to higher nutrient and power prices. Moreover, higher power costs and governmental risks besides trim nan entreaty of immoderate mining assets successful nan country.

Kenya, Tanzania, and Egypt show nan astir committedness retired of each of these markets, successful my view, but they person a smaller weighting because of marketplace cap/liquidity considerations. Egypt is nan only 1 of these 3 markets pinch a US-listed ETF.

Some alternatives/additions to this ETF that I americium considering are arsenic follows:

1) Egypt: Egypt ETFs and Commercial International Bank Egypt.

2) South Africa: South Africa user ADRs if nan marketplace becomes cheaper.

For nan clip being, I deliberation location is greater worth successful markets for illustration Latin America, arsenic banal markets are cheaper and much intelligibly positioned to use from higher commodity prices.

This article was written by

Dylan Waller floor plan picture

I americium willing successful frontier/emerging banal markets and different world markets ( ie. Japan/Korea).  My articles will chiefly attraction connected stocks I americium monitoring now based connected value of management/emerging marketplace exposure/valuation.

Disclosure: I/we person nary stock, action aliases akin derivative position successful immoderate of nan companies mentioned, and nary plans to initiate immoderate specified positions wrong nan adjacent 72 hours. I wrote this article myself, and it expresses my ain opinions. I americium not receiving compensation for it (other than from Seeking Alpha). I person nary business narration pinch immoderate institution whose banal is mentioned successful this article.

Editor: Naga



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