South Africa's World Cup Win
The South African soccer team hasn’t quite pulled off the home-town win in the World Cup yet - but I'm not worried. The host country, one that many point to as an underdog, has plenty of shots - the first being today when they face Uruguay at 2:30 eastern.
Even if South Africa becomes the only host country never to make it out of group play, they’ve still scored a major win with these games. Much like the Beijing Olympics were China’s debutante ball, so these games are South Africa’s coming of age party.
Risk-averse investors say that investing in China right now is like investing in 1908 U.S., and investing in Africa is like investing in 1808 U.S. They see Africa as the last frontier of emerging markets, a Wild, Wild West for capital, and are hesitant to put money to work there just yet.
Sure, investing in Africa entails a bit more risk than your average income investor might like. Geopolitical instability and decades of disappointing economic growth have made the investment climate in Africa uncertain, if not terrifying.
But for small-cap investors, taking measured risk for outsized gains is in our DNA. And this huge continent has upside in both the near and distant future.
The African continent is incredibly rich in high-demand resources like oil, gold and silver. Foreign direct investment into Africa has bucked the global decline, increasing 16% in 2008. This could be because the rate of return on foreign investment in Africa is the highest of any developing region. The continental GDP could hit 7% this year, with a South African economic recovery leading the pack. It's an untapped market with over a billion people, just waiting to be developed.
Unfortunately, investing directly in Africa is out of reach for most retail investors. Few Africa-based companies are listed on U.S. exchanges, and buying companies on African stock exchanges is a near impossibility.
Some investors are looking to the South African rand as their South African play, hoping the currency will reflect both the increased visibility of World Cup coverage as well as domestic growth. But given that South Africa is the world’s largest gold producer, the rand is more likely to track the price of gold rather than the number of spectators at the Nelson Mandela Bay stadium.
Buying the rand isn’t a great way to capitalize on South Africa’s growth, or on gold’s rise. There are better ways.
To take advantage of the gold bull market, I’ve written a full report about my favorite gold company. This company has over $20 billion in proven gold reserves, with a market cap of around $200 million. Even if this company only mines 1% of its reserves, it could double its current share price. Click here for the full write up on this four dollar gold stock.
To take advantage of Africa’s growth, here are a couple small-cap heavy Exchange-Traded Funds (ETF) that allow retail-investors to gain exposure to this untapped market:
This ETF represents the broadest cut of Africa available. The fund includes 50 companies fro 10 disparate African states, overall a pretty good geographic mix. AKF has no stocks above a $5 billion market cap, with the majority of firms falling into the small cap range. Almost half of the ETF consists of South African and Egyptian firms, the two largest countries by GDP in Africa. The fund’s three largest sectors by holding are banks, basic resources and telecommunications - an allocation that reflects Africa’s current as well as future strengths.
The fund attempts to replicate the Dow Jones Africa Titans 50 Index, the benchmark index for the continent. This ETF is essentially flat so far in 2010, not bad considering other emerging markets like China are down double digits. It does have a dividend yield of 0.79 percent, and carries a net expense ratio of 0.88 percent. For those who want to invest in the continent as a whole, Market Vectors Africa Index represents the best opportunity.
iShares MSCI South Africa Index (NYSE: EZA)
This ETF is more of a pure-play South Africa fund. Not a bad move considering the World Cup host is the leading economic force in Africa. South Africa alone holds 90% of the world’s known platinum reserves, 40% of its gold reserves, and massive coal deposits. If the continent as a whole will benefit from increased demand for commodities, then South Africa will be the big winner. Further, some economists believe the World Cup could give South Africa’s GDP a 0.5% bump.
The fund, with its heaviest representation in materials, financials and telecom, has done pretty well. Over the past 12 months the stock price climbed 20%. There is tremendous growth potential in the region, and definite upside left for this ETF.
EZA is a bit cheaper than AFK, with an expense ratio of only 0.66%. I also think that even without direct exposure to other African states, this South African ETF will capture the momentum of the whole continent.
These ETFs aren’t strictly small-cap funds, but they are mostly comprised of small-cap companies and offer investors in this asset class exposure to the African continent - and the opportunity for out-sized gains traditionally associated with small companies.
There has been a quiet reversal in Africa over the past decade. Rampant inflation has been mostly stamped out. New trade laws have opened up the continent to the world. Perhaps Africa is the final frontier for investors, but it won’t stay a frontier for long. Africa’s development efforts are finally yielding hard-earned fruit.
Put these ETFs on your radar screen, and consider taking a small position for the long haul. Investors whose African attention-span is only as long as the World Cup are sure to miss out on one of the top growth stories of the century.
