Returns from the motherland - investing in Africa - includes related information on investment possibilities

Black Enterprise, May, 1997 by Judith Aidoo

Beyond the romantic notion of investing in Africa is the potential for breath-taking gains -- but heart-breaking losses, as well.

AFRICA HAS BEEN A CONUNDRUM FOR Centuries. A continent steeped in natural resources, until recently, it's been a pauper in terms of sheer economic power. Even now as changes for the better begin to surface, Africa remains one big riddle for individual investors, too. Many of its burgeoning stock markets have rocketed so quickly in value, they've surpassed even robust gains by the S&P 500. Stateside, though, investors haven't gotten a glimpse of the jackpot. Of the nine U.S. mutual funds that focus on Africa, the dosed-end Morgan Stanley Africa Investment fund lead the peck with a meager 10% for the year ending January 31, 1997. At the same time, four others posted losses as great as 21%, according to Lipper Analytical Services.

So what's to blame? Political upheaval? Outside flare-ups in countries like Zaire, the continent has been making strides to install democracies from the Mediterranean to Cape Hope. How about economic woes? Wrong again. Yes, some of the continent is still having trouble, but in many countries, bloated state enterprises are being privatized and a renaissance is under way. Zimbabwe, for example, has cut inflation in half and saw its gross domestic product jump 8% last year, compared to a measly 2% for the U.S. economy.

So how about shaky currencies? True, the South African market gained over 10% last year while losing 21% in dollar terms because of a devalued rend. But Johannesburg was the exception rather than the rule, when you consider that markets like Zimbabwe and Nigeria were up more than 50% in dollar terms. Instead, the dismal records of mutual funds available to individual investors is a testament to just how tricky investing profitably in Africa can be.

By now, you're probably wondering if Africa is simply the playground of big institutional investors who have the girth to come in, take big stakes and walk away winners. Not necessarily so. All the same, investing in Africa is not for the meek; there's potential for breath-taking gains, but colossal losses, as well.

Before looking further, it's best to know the ups and downs of international investing. Simply put, the rationale for investing abroad is similar to your mother's admonition never to put all your eggs in one basket. Yes, stocks at home have boomed, but as we all know, markets move in cycles, and share prices are inevitably doomed to fall at some time. That's when it pays to be invested in foreign markets, some of which are growing much faster than the U.S. economy.

Says George Van Amson, a principal at Morgan Stanley & Co.'s listed equities desk: "With diversification over the long run, you get better returns with less risk."

Emerging markets, including the African economies, are a special beast. Their growth, however spectacular, can be highly volatile and erratic. Local currencies soar and dip year after year. A year of outsized gains can be wiped away if a country's money dives relative to the U.S. dollar.

That said, we'd first recommend that you have a solid footing at home before setting off for Africa. As a slice of your overall portfolio, money managers say international stocks should make up 10%-40% of your investments, according to your temperament for risk. As tempting as Africa might seem, Clifford Mpare, a portfolio manager for the Calvert New Africa Fund, suggests that since emerging markets account for approximately 12% of the total capitalization of global markets, the average investor may wish to have 2%-4% of his or her portfolio invested in emerging markets like Africa. Thus, even if you are a daredevil investor, we recommend that you place no more than 10% of your portfolio overall in investments there. We'd also suggest you get ready to do some serious homework. You'll find statistics on African markets and companies relatively difficult to come by, even when you're working through a broker. Secondly, your research should cover country economies as well as stocks and mutual funds. And finally, we offer one of the fundamental tenets of African investing: don't believe the hype. In the words of Francis Daniels, managing director of the Africa-America Group, who got into the business after years of studying the continent, "To do well in Africa, you must be capable of suspending your prejudices in order to look coldly and clearly at the political and economic trends."

A MAP AND A COMPASS: LEARNING THE LAY OF THE LAND

Research by the IFC, a division of the World Bank, shows that as a group, the 14 African stock markets act as a very good foil to periods when the U.S. market might slow. That's unlike other emerging markets in Latin America and Asia, whose dependence on U.S. trade is so great that the minute the New York Stock Exchange catches cold, they catch the flu. What's more, African markets seem quite autonomous, meaning turmoil in Zaire has no effect on Nigeria. John Niepold, a portfolio manager with Emerging Markets Management, says no one looks at Africa as a single country. "In actual fact, you have many diverse countries and markets," he says.