How to choose the best African stocks for your portfolio

Although the continent has continued to suffer a number of macroeconomic aftershocks in the wake of the Covid-19 pandemic, which has hampered the growth prospects of many African countries, the outlook for the top performing economies on the continent is broadly positive.

This is despite the fact that the ongoing conflict between Russia and Ukraine has had a harsh impact on the continent, leading to higher commodity prices, inflated food costs, increased fuel prices and headline inflation rates that have spiralled.

Despite this confluence of factors, however, according to the IMF’s recently published World Economic Outlook report, five of the world’s fastest growing economies are located in Africa. This includes Angola, Ethiopia, Nigeria, Kenya and South Africa – all of which look set to experience significant continued growth in 2023 and 2024.

This has been bolstered by recent moves such as that by the African Union, which has pledged to integrate the many recommendations set out in the newly released Africa’s Macro-Economic Performance and Outlook report.

Investing in African companies

For individuals looking to take advantage of investment opportunities on the continent, this is good news. Reports such as these speak to the resilience of the economies of many African countries as well as the corporate and commercial innovation that is continuing to take place on the continent.

Since the early 2000s, many countries in Africa have made a concerted effort to turn their economies into attractive investment opportunities for investors with interests in emerging markets.

The combination of a vast continent rich with natural resources, a young and increasingly educated workforce, and steadily growing political and economic stability has proved incredibly attractive for many investors. This has seen many take advantage of the opportunities to invest in JSE top 40 stocks.

Currently, there are around 29 different stock exchanges in Africa, representing 38 different African nations’ capital markets. The five largest of these are based in Johannesburg, Nigeria, Morocco, Egypt and Kenya. Of these, the JSE – or Johannesburg Stock Exchange – has proved particularly attractive to investors.

How to choose African companies to invest in?

These exchanges provide both retail and institutional investors the opportunity to access local African publicly listed companies. The JSE, for example, has around 264 publicly listed companies, while the Egyptian and Nigerian stock exchanges host 240 and 177 companies, respectively.

But for investors looking to take advantage of these investment opportunities, how can you spot the best companies to invest in?

If you don’t want to deal with the hassle of investing in individual companies, which requires a relatively high level of financial and economic literacy, one good option is to use exchange-traded funds (ETFs) or mutual funds. ETFs and mutual funds are available both domestically and outside the continent, and allow you to invest in a fund that holds a basket of diversified securities.

Another way to choose African companies to invest in is to choose them based on the industry or sector they are in. For example, if you believe the mining industry in Africa is going to perform particularly well in the months and years ahead, you can simply choose to stick to companies working in that sector of the economy.

Based on this, you would then have to do further research to select the best performing companies from within that sector. However, sticking to one specific sector or industry significantly cuts down on the amount of research you have to do. The only issue with this approach is that it would not leave you with a particularly well diversified portfolio.

The other approach, as mentioned, is to do your research and pick individual African stocks to invest in. Although this can be a productive approach, it requires not only a deep understanding of the economy and the stock exchange you want to invest through but also a high level of due diligence regarding the particular company. This might be difficult, given that so many African companies are relatively young and might not have the same amount of public information available as those in other countries.

Despite these difficulties and challenges, however, Africa and African stock exchanges represent some of the most exciting investment opportunities available today. Although the continent faces many challenges in the road ahead, such as tightening liquidity, it is clear that there is a strong entrepreneurial flair present across the region, and many African countries and business people look set to experience significant growth in the months and years to come.