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from African Business Source Expert
Ryan Shen-Hoover

Five Reasons Why I Invest in African Stocks

ernst060615-30019Investing in African stocks strikes many US-based investors as impractical at best, and foolhardy at worst. Here are a few reasons why it’s the first place I look for investment bargains.

1. Africa’s where the growth is.

African economies hit a speed bump in 2008, but most will be firing on all cylinders again soon. Global demand for commodities, growing consumer appetites, and reduced foreign debt loads bode well for a rapid recovery. The IMF expects 21 sub-Saharan countries to grow by 3.0% or more in 2009. Uganda and Malawi both look to post 6% growth! Meanwhile economists expect the US economy to shrink 2.6% this year.

2. African stocks are cheap.

Typically, rapid economic growth translates into sky-high stock prices sky-high. Not so in most African markets. At this writing, Mauritius’ largest listed company, New Mauritius Hotels, trades for less than 10 times its trailing 12 months of earnings. Truworths, South Africa’s blue-chip clothing retailer, has a P/E ratio of 11.7. And fast-growing banking group, Ecobank, trades for less than book value. Meanwhile the main US market index, the S&P 500, now sports a P/E ratio of 19.1.

3. Their relative risk is overestimated.

Make no mistake. African stock markets are not for the faint of heart. Price swings can be huge. Sub-Saharan Africa’s four largest stock exchanges are all more volatile than the S&P 500. But volatility is not necessarily synonymous with risk. The outstanding performance of African stocks has more than compensated for their greater volatility. In fact, the risk-adjusted return of the S&P 500 was trounced by nearly every African stock market over the past five years.

4. To help develop Africa’s capital markets.

Each dollar invested in an African stock helps to build the liquidity of the exchange on which it trades. Rising liquidity lowers risk. Lower risk attracts additional investment to the exchange. Greater investment on the exchange lowers the cost of capital for listed companies. A lower cost of capital leads to increased growth and job creation.

5. It’s easier than ever to do.

Africa remains a relatively difficult place to invest, but it’s becoming less so with each passing year. More and more funds, ADRs, and ETFs are hitting the market. African exchanges have improved their trading systems and governance. Brokers are improving their quality of service. US investors can trade in real-time on the Johannesburg Stock Exchange, and other exchanges require little more than an emailed request to a broker.

This list is by no means exhaustive, but it captures the essence of what makes African stock markets such a compelling opportunity.

Do you invest in Africa? If so, why? Tell me in the comments.

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Ryan Shen-Hoover

Ryan Shen-Hoover is the founder of InvestingInAfrica.net and co-manager of Kivuno Capital Management, LLC.

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