For Serious Investors: It's Time for Africa

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World Market Pulse submits:

In this era of global uncertainty, investors are wary of investing in alien markets. A lack of fundamental analysis of the potential good upcoming markets also acts as a deterrent for investors. Some markets follow the global patterns and some just swing with an entirely different wavelength. One such market that historically has never followed the global market and its patterns is the African continent. The African people and more importantly the African markets have their own dynamic life and irrespective of current trading volumes, liquidity or fundamentals, African markets have mostly walked without much global baggage. Considering the fact that most African regions are bracing themselves to kick-start their economic progress, a long-term growth potential is the best possible way to look at the African markets.

Gone are the days when Africa was considered to be a poor continent rich only in natural resources but where poor people fought for survival amid disease and poverty. Africa, the birthplace of human civilization, is slowly but surely getting its rightful place in the history of mankind. African countries are not simply spectators to the economic rise of China and India but are a party to it. Africa is not only attracting investors from China and India, but African ETFs have also shown substantial gains in the recent times. There is no doubt that some African nations offer a tremendous growth opportunity for the investors, especially for those looking at emerging economies outside the BRIC nations. Of course there are people who are skeptical of the kind of growth African nations can achieve, but as South Africa showed with the successful completion of the FIFA World Cup Football 2010, the continent is ready to attain its lost glory.

The largest economy in Africa is the Republic of South Africa with a 77% total market cap of the MSCI EFM Africa index components. Egypt, Nigeria and Morocco make up 5%-10% each, and smaller investments include Kenya, Mauritius and Tunisia. Together, the African Nations make up 10% of the world's emerging markets market cap. According to a recent International Monetary Fund report, at least eight African countries were headed toward emerging market status when benchmarked against the founding members of the Association of Southeast Asian Nations, which were among the early emerging markets. The criteria of growth, private sector-led growth, and investable markets were met in Botswana, Ghana, Kenya, Mozambique, Nigeria, Tanzania, Uganda and Zambia. The International Monetary Fund (( IMF )) has further projected that sub-Saharan Africa's economy will expand 4.7% this year, double 2009's rate. Commodity exporting countries are likely to lead the growth.

African ETFs Options

1: Van Eck Africa ETF ( AFK ): This is an Africa ETF that invests in equities in the entire continent. This index comprises stocks that have a market capitalization of greater than $200 million, and if the market capitalization of any stock falls below $100 million, then that company may be deleted from the index.

Country Breakdown

South Africa 29.61%
Nigeria 20.21%
Egypt 14.25%
Morocco 13.61%
Equatorial Guinea 6.01%
Nigeria 5.00%
Zambia 2.48%
Mali 2.38%
Canada 2.06%
Kenya 0.98%
Ghana 0.86%
Australia 0.91%
Angola 0.87%
South Africa 0.71%

Top Ten Holdings

Tullow Oil PLC 6.01%
Mobile Telecommunications Co 5.00%
First Bank of Nigeria 4.41%
Maroc Telecom 3.74%
Old Mutual PLC 3.58%
MTN Group 3.54%
Orascom Constructions Inds 3.37%
Sasol Ltd 3.29%
Attijariwafa Bank 3.29%
Nigerian Breweries 2.99%

The equity markets in Africa are considered to be less developed than even other emerging countries, so there can be higher volatility in prices and greater risk of illiquidity, inflation and lower market capitalization. The fund invests in only large and medium market capitalization firms. While there is some overlap to AFK, this fund does not stray from a South Africa focus. The major holdings include large gold and platinum firms, with several banks and telecom companies thrown into the mix.

2: The iShares MSCI South Africa Index Fund ( EZA ) is considered the best play on Africa since South Africa is the biggest economy on the continent. This ETF follows the MSCI South Africa Index, an index that measures the performance of the South African equity market. This ETF's 47 holdings focus primarily on the industrial materials (32%) and financials (27%) sectors. The fund invests in only large and medium market capitalization firms. While there is some overlap to AFK, this fund does not stray from a South Africa focus. The major holdings include large gold and platinum firms, with several banks and telecom companies thrown into the mix.

Top 10 Holdings (59.86% of Total Assets)
Company/ Symbol / % Assets
Anglo Platinum, Ltd. (AGPPY.PK) N/A 2.85
AngloGold Ashanti Limited ( AU ) N/A 5.57
Firstrand Limited (FANDY.PK) N/A 3.12
Gold Fields Ltd. American Depos ( GFI ) 3.96
Impala Platinum Holdings (IMPUY.PK) N/A 6.58
Mtn Group Limited (MTNOY.PK) N/A 10.48
Naspers Cl N (NPSNY.PK) N/A 6.96
Sanlam Ltd (SLLDY.PK) N/A 2.82
Sasol, Ltd. ( SSL ) N/A 10.33
Standard Bank Group Ltd (SBGOY) N/A 7.19

EZA Sector Breakdown
Sector Percentage
Industrial Materials 32.21%
Financials 26.41%
Telecom 10.74%
Energy 9.57%
Consumer Services 7.22%
Media 6.07%
Consumer Goods 4.53%
Healthcare 2.03%
Hardware 0.00%
Software 0.00%
Business Services 0.00%
Utilities 0.00%

3: SPDR S&P Emerging Middle East and Africa ETF ( GAF ): The fund not only covers the African continent but extends its portfolio to the Arabian Middle East geo economic areas as well. The fund tracks the S&P Middle East and Africa BMI Index, which is a market capitalization weighted index that defines and measures the investable universe of publicly traded companies domiciled in emerging Middle Eastern and African markets. The gross expense ratio of this fund is 0.59%. The country with the biggest weight is South Africa with 61.6%, followed by Israel with 24.31%, Morocco 7.89% and Egypt 5.53%.

GAF Sector Breakdown

Financials 28.51%
Industrial Materials 26.31%
Healthcare 14.22%
Telecom 9.01%
Consumer Services 7.10%
Energy 5.46%
Media 3.48%
Consumer Goods 3.35%
Software 1.41%
Hardware 0.52%
Business Services 0.33%
Utilities 0.03%

4: WisdomTree Dreyfus South African Rand Fund ( SZR ): This actively-managed currency ETF offers exposure to the South African Rand, seeking to deliver total returns reflective of both money market rates in South Africa available to foreign investors and changes in value of the South African rand relative to the U.S. dollar.

With minimal consumer spending, the South African Rand is relatively unsusceptible to fluctuations in exchange rates. This fund has yielded consistent growth since its inception in 2008. This currency is slightly less volatile than EZA, which makes this currency ETF well suited for long-term holding. The YTD total return on NAV is 23.02% and on share price is 25.94%. Not as large as EZA's returns, but plenty of room for long-term growth.

Issuer: Wisdom Tree
Expense Ratio: 0.45%

SZR Performance

52 Week Return: 8.66%
YTD Return: 0.18%
1 Week Return: -0.82%
2 Week Return: 2.29%
4 Week Return: -1.51%
13 Week Return: -1.93%
26 Week Return: 0.32%

SZR Dividend
Dividend: $0.09
Dividend Date: 12/22/08
Dividend Yield: 0.32%
Annual Dividend: $0.09

South African Growth Overview:

As much as the South African Reserve Bank lowers interest rates, consumer spending remains unchanging. Rather than being a consumer-driven economy South Africa thrives on a product-based economy. Materials production is at its highest. South Africa's ports help transport the majority of the world's oil. Apart from currency ETFs, the South African stock exchange operator JSE Ltd hopes to list a platinum exchange traded fund (( ETF )) on the bourse this year as it looks to capitalize on increasing investor appetite for commodity-based products. JSE was also looking at launching an Africa ETF in South Africa, which would trade blue chip firms from other big economies on the continent, particularly Egypt, Kenya and Nigeria.

Investing in Africa

Investing in Africa is high risk for many reasons, including currency fluctuations, poorly developed markets and political risk. Yes, there are still some unstable countries, but the number of African democracies has jumped from just four in 1990 to 17 today. At the same time, many countries have begun liberalizing their economies and developing their capital markets. Not just Ghana and Egypt, but African markets overall have easily outperformed the world averages last year and over the past three years. Moreover, the number of stock exchanges has jumped from ten to 18 in the past decade. The International business community and most multi-national corporations operating businesses in Africa have been reaping significant dividends from their investments and in many cases the rates of return have been higher than from those in other regions. Another very good reason to look to Africa is that investment, rather than charity, is more likely to lift Africa out of its troubles and poverty in the long-term.

Favorable Business Environment in Egypt

The current conditions in Egypt are conducive to conducting business successfully. The government is making a concerted effort towards attracting international companies to the country, and in-line with this, several projects have been initiated to improve the investment climate even further. The economy is diversified and investment opportunities exist in almost every sector. The reforms of the Egyptian government have brought Egypt to the economic fore. Bureaucracy has been reduced considerably, but still needs further improvement in order to give sustainable results. Unemployment may be reduced to 8.5% according to government data, but taking unknown unemployment numbers into account, independent experts assume a value of around 20% or higher. More investment in education is needed to provide a sufficient number of qualified workers.

Although there has never been a better time to look at the African markets for the serious long term investor, it is advised that you keep your objectives, constraints and plans in mind at all times while you research, invest in, manage and monitor African stocks. And, consider getting professional advice when making investment decisions.

Disclosure: No positions

See also Three ETFs to Invest in the World's Top Stock Market on

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , ETFs

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