Topic: ETFs

Africa’s big potential comes with risks

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The world’s second largest continent, Africa, has equally big potential. Where several of its national economies remain focused on growth, other African countries continue to grapple with weak corporate governance structures, poverty and military conflicts. Those factors have helped to hold back economic development. However, these challenges have done little to prevent individual companies from developing successful businesses.

Here is an ETF that provides exposure to the continent’s top companies. While South African firms form the fund’s largest component, Moroccan companies are also significant contributors. We previously covered South Africa in our April 2018 issue; this time we look at Africa’s most-northwestern nation.

VANECK VECTORS AFRICA INDEX ETF $21.03 (New York symbol AFK; TSI Network ETF Rating: Aggressive; Market cap: $55.9 million) invests in companies operating primarily in Africa.

South African investments make up 33.6% of the fund’s assets, followed by Morocco (17.6%), Kenya (10.3%), Nigeria (8.9%) and Egypt (4.6%).

Financial companies account for 37.4% of its assets, while Resources (20.8%), Telecommunication Services (12.5%), Consumer Non-Cyclicals (9.7%), and Technology (9.1%) are other key segments.

The ETF holds a portfolio of 82 stocks; the top 10 stocks make up 46.0% of its assets. Top holdings include: Naspers Ltd. (South Africa; media and Internet, 8.3%), Attijariwafa Bank (Morocco; 6.3%), Safaricom PLC (Kenya; telecommunications, 5.7%), Maroc Telecom (Morocco; 5.2%), Commercial International Bank (Egypt; 4.4%), Guaranty Trust Bank (Nigeria; 3.8%), Tullow Oil (U.K.; African oil production, 3.8%) and Anglo American (U.K.; resources, 2.6%).

The ETF started in July 2008 and charges a relatively high MER of 0.78%. At $55.9 million, the fund has a small asset base and offers limited liquidity with an average of $145,000 in units trading daily.

The fund has a p/e of 12.9 based on the forward earnings of the companies it holds. The ETF pays an annual dividend which amounted to $0.336 in 2018 and a yield of 1.6%.

Successive occupations by Spain and France ended in 1956 with Morocco gaining independence from France. Sultan Mohammed V, the current monarch’s grandfather, organized the new state as a constitutional monarchy, and in 1957, assumed the title of king.

Pro-democracy protests in 2011 forced the current monarch, King Mohammed VI to implement a reform program. It included a new constitution under which new powers were extended to parliament and the prime minister. In November 2011, the Justice and Development Party (PJD)—a moderate Islamist party—won the largest number of seats in parliamentary elections, becoming the first Islamist party to lead the Moroccan government. The PJD again won the largest number of seats in nationwide parliamentary elections in October 2016.

Morocco covers a land area roughly the size of California and occupies a strategically important location along the Straight of Gibraltar. It is the only African nation with both Atlantic and Mediterranean coastlines. Natural resources include phosphate, iron ore, manganese, and zinc (see box on next page for more information).

The population count is 35.2 million with a workforce of 12 million and an unemployment rate of 10%, although youth unemployment is higher at 22%. The official languages are Arabic and Tamazight, while French is often used as the language for business and government.

Morocco has capitalized on its proximity to Europe and relatively low labour costs to build a diverse, market-oriented economy.

Key sectors of the economy include agriculture, tourism, aerospace, automotive, mining, textiles, and apparel. The country’s largest trading partners are Spain, France, Germany and Italy.

Morocco has increased investments in its port, transportation, and industrial infrastructure with the aim of positioning itself as a center for business throughout Africa. Industrial development and infrastructure improvements—as demonstrated by a new port and free trade zone near Tangier —are improving Morocco’s competitiveness.

In the 1980s, the country was heavily indebted before pursuing austerity measures and pro-market reforms overseen by the IMF. Since taking the throne in 1999, King Mohammed VI has presided over a stable economy marked by steady growth, low inflation, and gradually falling unemployment. To boost exports, Morocco entered into a bilateral Free Trade Agreement with the U.S. in 2006 and an Advanced Status agreement with the E.U. in 2008.

The nation has a gross domestic product of $299 billion, about the same as Greece, Portugal and Israel. Growth in GDP averaged 3.6% per year over the past decade, but slowed down in 2018 to 3.0%. According to the World Bank, the country’s economic performance is expected to improve over the medium term enabled by sound fiscal and monetary policies, and an improved investment environment. Growth is expected to drop to 2.9% in 2019 due to lower agricultural output after two exceptional years. Still, stable growth of 3.6% is expected over the medium term.

In 2014, Morocco eliminated subsidies for gasoline, diesel, and fuel oil, which helped to improve the country’s budget deficit, although the deficit was still 3.6% of GDP in 2018. Government debt is somewhat high at 65% of GDP but the primary rating agencies assess the country’s debt as investment grade.

The Moroccan currency, the Dirham, is pegged to the euro and U.S. dollar. This helps keep inflation—just 1.7% in 2018—low. The stable inflation rate also supports low-interest rates. The central bank policy rate is currently 2.25% while 10-year government bonds have a yield of 2.87%.

The ETF lost 18.1% over the past year compared to an 11.2% loss for the MSCI Emerging Markets Index. Over the past five years, the ETF lost 30.5% compared to a gain of 3.9% of the emerging markets benchmark.

The VanEck Vectors Africa Index ETF carries very high political risk. However, it’s okay for highly aggressive investors to hold if they want exposure to stocks that will directly benefit from Africa’s growth.


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