ETFs: The African Equities Frontier

SMSFundamentals | Sep 28 2022

Africa collectively is one of the fastest growing economies in the world, and a growing number of African ETFs is providing opportunity for investors.

-As Africa becomes less volatile and wealthier, investor interest is growing too
-One of the easiest, less risky exposures is through ETFs
-Investors already can choose from 100 Africa-focused ETFs

By Omega Ukama

Fund managers and investment analysts say exchange-traded funds (ETFs) are a viable route into the African equity market for global investors, who have been avoiding the opportunity due to perceived risks, despite improvements in the continent's political and economic landscape that have raised the appeal of investing there.

Even though systemic poverty, corrupt governments, violence, bloodshed and war remain rampant, the region has quite a bit going for it, including the fact that this dark legacy is gradually passing.

The continent is home to more than 1bn people, half of whom the International Monetary Fund estimates will be under 25 years old by 2050.

With the world's largest trade bloc – the African Continental Free Trade Area – and a 1.2-bn-person market, the continent is charting an entirely new course, capitalising on its resources and people.

Africa's real Gross Domestic Product (GDP) grew by an estimated 6.9% in 2021, a strong recovery from the contraction of -1.6% in 2020. The continent's economic growth in that year surpassed the world average and that of other regions.

Individual country GDP growth has averaged 5% each year since 2000, according to the African Development Bank. The rate is only marginally lower for the entire continent.

Many believe that if Africa maintains and accelerates structural reforms over the next half-century, it will be able to replicate China's tremendous ascent during the last 50 years.

Still, doing business in Africa continues to be associated with real and perceived risks. Institutional and infrastructure barriers, risk and reward imbalances, and high transaction costs can make it difficult for global investors to find opportunities in equities or the region's broader economy.

This is where experts say ETFs come in.

"African equities are under-represented in most global investors' portfolios and through ETFs they can gain access to the higher reward potential markets while controlling their risk," Todd Rosenbluth, the Head of Research at VettaFi said, adding that "ETFs provide liquidity and accessibility to African markets".

A survey by this author found about 100 ETFs that are exclusively focused on African equities, the majority of which are listed on exchanges within the region.

When funds with exposure to African equities as well as other niches are included, the number climbs by at least a couple of multiples. A handful of multi-sector emerging market ETFs have some exposure to the region, albeit at modest weights.

"I very much like Africa-focused ETFs. A concentrated emerging market with plus-1bn population and pockets of really strong growth potential across industries (financial, telco, industrial, mining)," Simon Brown, a South African investment analyst, stated.

"Compared to their peers they often have higher costs due to having to access many markets and often less liquid and higher fee markets. This puts many investors off them. But as a tactical allocation, I prefer Africa for emerging markets over the more traditional Asia," Brown added.

There are around 29 stock exchanges in Africa, representing 38 countries, including two regional exchanges. The continent features a few prominent exchanges as well as many new and minor exchanges with low trading volumes and few listed stocks.

By market capitalisation, the Johannesburg Stock Exchange (JSE) is Africa's largest stock exchange. Over 70% of the ETFs registered in Africa are traded here. There are 91 funds on the exchange, with a market value of R114.6bn (approx. A$9.6bn) at the end of July 2022.

"The African ETF market is still developing relative to some of the global markets. However, it is catching up fast both in terms of cost (the cheapest ETF on the JSE is now on a 0.1% total expense ratio the fee charged by the ETF operator ) and the types of exposures available. Local (regional) equity, bond and property exposures are often more efficiently accessed on the JSE than on other global exchanges," said Gareth Stobie, the Managing Director at CoreShares.

Stobie's firm is a passive investment management firm in South Africa, specialising in index-tracking investment solutions across ETFs, unit trusts and segregated mandates.

He said the firm's funds are easily accessible to global investors.

" as long as the investor has access to the JSE via a member broker, then they can access the products."

The first ETF on the JSE was listed on November 27, 2000; the Satrix Top 40, which tracks the performance of the FTSE/JSE Top 40 index that includes the 40 largest companies on the JSE, ranked by investable market capitalisation.

Only roughly half of the ETFs on the JSE are solely dedicated to African equities; the remainder are focused on commodities, global equities, as well as African and global bonds.

The majority of Africa-focused funds on the market have sole exposure to shares on the JSE, with only a few focusing on stocks in the rest of the region.

The JSE's first Africa-focused ETF-ex South Africa came in 2017, the AMI Big50 which offers exposure to 50 African blue-chip companies outside of the country.

Other exchanges within the region that are trading ETFs include; Ghana Stock Exchange, Botswana Stock Exchange, Kenya's Nairobi Stock Exchange, and the Zimbabwe Stock Exchange (ZSE). A good number of the funds listed on these exchanges have their primary listing on the JSE.

Most ETFs in the rest of Africa were introduced over the past five years. For instance, four of the five funds on the ZSE were listed in 2022, and according to the country's Securities and Exchange Commission, SecZim, "many more are on the way".

"We have a lot of catching up to do but there is a paradigm shift in Zimbabwe's capital markets. There is a generation that is coming up with new products, that is coming up with new innovations, and as SecZim, we will continue to be a catalyst for this development and the modernisation of our capital markets," SecZim said in a statement after one of the listings.

The sentiment is, however, still strong among investors favouring African exposure via ETFs on more established global markets. And issuers in global markets are doing more to satisfy the growing demand for Africa-focused ETFs.

HANetf, one of Europe's biggest ETF white-label services, says it has had many enquiries from African asset managers looking into launching ETFs, from South Africa to Nigeria.

"We believe Africa is a key growing market of the future, as countries on the continent continue to get wealthier. Indeed, we hope that the financial services sector in African nations will leapfrog old legacy fund structures, such as those still used out of habit in places like the United States and Europe, straight to using the ETF structure," said Hector McNeil, co-founder and co-CEO of HANetf.

In the grand scheme of things, though, Africa-focused funds are still a drop in the ocean, representing less than 3% of the world's 8000-plus funds.

"There are very few ETFs currently available for exposure to Africa. ETF offerings are typically based on investor interest. Based on the number of products available and asset levels, it seems investors look to the broader emerging markets space or natural resources," said Lois Gregson, the Senior ETF Analyst at FactSet.

Amin Rajan, the chief executive at CREATE-research, said Africa-focused funds could do with clearer and unique selling points, but she is optimistic about the market's outlook.

"It is good, so long as the underlying assets focus on the favourable growth dynamics of Africa and deliver decent returns. Investors are now ultra-demanding.

"Africa funds provide a diversification opportunity, so long as they meet investor expectations. Investors are spoilt for choice in today's very over-crowded ETF space, where a vast majority are very sub-scale," Rajan said.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.

FNArenais proud about its track record and past achievements: Ten Years On

Share on FacebookTweet about this on TwitterShare on LinkedIn

Click to view our Glossary of Financial Terms