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The African continent, with a total population approaching 1bn, is spread over 53 countries ranging in size and diversity from Morocco in the north to Seychelles in the Indian Ocean. These markets also vary in their development and sophistication. Economic growth rates, political maturity and stability differ widely, as do culture, language and topography.

Due to inherent structural inefficiencies such as a lack of custody facilities, long trading cycles, and inefficient settlement mechanisms for foreigners, investment in African markets has taken some time to become popular. But perceptions are changing. Once considered exotic, African companies’ equity is increasingly prevalent in portfolio allocations, which in turn is slowly making investing in Africa less risky. And so far, economic growth has been strong. With the steep rise in stock prices in other emerging markets, investors have begun searching for the next source of alpha, and Africa seems to be a logical place to explore.

For the first time in three decades, the African economies are growing with the rest of the world, estimated at 3.2 per cent a year over the last 10 years. The projection is 5.4 per cent for 2008. Although there is a large amount of foreign interest in the continent’s rich resources – especially from China and India – individual markets have grown regardless of whether or not they are mineral exporters. The growth is attributed to a combination of factors including increased global trade, higher levels of foreign direct investment and new emerging stock markets, as well as sound policy initiatives regarding inflation, economic regulation and corruption.

Historically, the speculative nature of credit quality, combined with the lack of transparency and regulation in much of Africa, has restricted foreign investment and economic growth. However, issues regarding governance, economic management and consequent macroeconomic stability have been addressed. First, Transparency International’s 2007 Corruption Perceptions index placed Botswana 38th, the highest of any African country. Second, beginning in 1993 and with strong assistance from the International Monetary Fund, Kenya has eliminated price controls, removed foreign exchange controls and introduced conservative fiscal and monetary policies. Third, beginning in 1998 and continued in 2004 with the European Neighbourhood Policy, Tunisia has taken steps to form stronger economic ties with Europe, including reduction of trade barriers.

The World Bank’s 2007 Africa Development Indicators report points out that many African markets have experienced growth before, but this growth is often followed by devastating decline. The majority of the populations, often very poor may gain little during growth periods and suffer disproportionately during economic downturns.

A factor that can heavily affect this trend is whether or not the country is a commodity market. Of course, there is no direct link between the lack of diversity of the economy and subsequent swings in GDP growth, but reviewing real GDP growth figures over just the last few years for a sample of African markets reveals an example: Botswana, a nation highly dependent on the export of just a single commodity, experienced a much wider range of growth rates than Egypt, an emerging market where various services account for half of GDP.

Though there is no clear correlation between economic growth and stock market performance, investors do not want to miss partaking in the growth of these countries and have rushed in to benefit. African markets have experienced strong growth on the back of the rise in commodity prices, as is the case for Nigeria. Others are experiencing more service or manufacturing-driven growth, as is the case for Egypt and Kenya.

A number of indices and benchmarks have recently been launched to tap these markets. The new indices are designed to provide investors with access to Africa’s developing equity markets, as well as being a complete measurement tool for the performance of these markets. For example, a Pan Africa index covers 12 African markets – Botswana, Côte d’Ivoire, Egypt, Ghana, Kenya, Mauritius, Morocco, Namibia, Nigeria, South Africa, Tunisia and Zimbabwe – whereas an Africa Frontier index covers the smaller frontier markets of sub-Saharan Africa. Both of these indices aim to capture 80 per cent of the total market capitalisation of each country to provide investors with a comprehensive benchmark of African markets.

On the other hand, an Africa 40 index is designed to provide tradable exposure for index linked products and therefore focuses on 40 of the largest and most liquid companies operating purely in Africa. Companies must still be domiciled in Africa, or have the majority of their assets and operations in Africa, to be included in the index.

To illustrate the strong performance of markets in the region, an Africa Frontier index (Botswana, Côte d’Ivoire, Ghana, Kenya, Mauritius, Namibia, Nigeria, and Zimbabwe) had an average annualised return of 54.89 per cent over the last three years.

Over the same time period, the Pan Africa index (all nations in the Africa Frontier plus Egypt, South Africa, and Tunisia) had an annualised return of 18.65 per cent and the Africa 40 (providing investable exposure) had an annualised return of 43.70 per cent.

African markets are a disparate bunch, ranging in size, liquidity, state of development, and economic strength. Coverage of Africa is by no means exhaustive, but analysis of trends in these countries offers insight as to what is happening in the African continent at large. For each market, it is necessary to review GDP, market cap, value traded, debt obligations, performance of the local index compared to the S&P 500, S&P/IFCI composite and S&P Emerging Market indices and corresponding volatility, and diversity of the economy.

Botswana is considered a commodity market: diamond mining represents approximately 41.4 per cent of GDP. Côte d’Ivoire is also considered a commodity market: the agricultural sector (dominated by cocoa production), including forestry, accounts for approximately 28 per cent of GDP.

Egypt is a diversified market: about one-half of GDP is accounted for by services. Ghana counts as a commodity market: agriculture employs about 50 per cent of the labour force and accounts for 36 per cent of GDP.

Although agriculture remains the dominant sector in the Kenyan economy – accounting for 23.6 per cent of GDP – the market is considered diversified, on account of the range of agricultural products as well as the presence of petroleum and tourism industries.

Mauritius is seen as a diversified market: manufacturing and services account for more than 90 per cent of GDP. Morocco is also diversified: manufacturing, commerce and import duties and public administration all contribute to GDP in roughly equal amounts.

Namibia is considered a diversified market: although dominated by government services (owing to the size of the civil service), financial services, manufacturing, wholesale and retail trade and mining also contribute to GDP, while Nigeria is a commodity market – oil accounts for 70-80 per cent of government revenue, 90 per cent of export earnings and 25 per cent of GDP.

South Africa too counts as a diversified market: although mining remains an important foreign exchange earner, manufacturing and financial services contribute the larger share of GDP.

Tunisia is thought of as a diversified market: services (excluding public administration) account for around 40 per cent of GDP

Exasperated by recent political turmoil, GDP growth, local stock market performance and especially inflation in Zimbabwe (the government has recently begun to issue a $100bn (£54bn) – dollar note into the currency) are considered economic outliers and not indicative of the African continent as a whole. Poor economic management under the Mugabe regime has destroyed the once strong agricultural sector.

Unemployment in Zimbabwe is approximately 85 per cent. Eighty per cent of the population is in poverty and an estimated 3m people have left for South Africa, which has directly caused the severe shortage of skilled workers.

And finally, although President Mugabe has recently signed an agreement with opposition leaders laying out terms for power sharing, it is considered a modest step at best and may do little to alleviate the country’s economic woes.

Alka Banerjee is vice president of global index management for S&P Index Services and Steven Goldin is vice president, portfolio services for S&P Index Services