Returns From The Motherland

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

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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 closed-end Morgan Stanley Africa Investment fund lead the pack 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

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