South Africa: Beachhead on a Promising Continent

South Africa, surrounded on three sides by water, is a major logistical trading center for oil and other resources and home to aggressive and sophisticated multinationals that are seeking opportunities throughout the continent.

South Africa is home to ports through which OPEC oil is transported to the U.S. and the conduit through which African oil is transported to China and India. South Africa is geographically and strategically placed to mine and transport the world’s most precious commodities. Commonly thought of a gold play, mining is big business in South Africa and therefore it is no surprise that materials production is leading the recovery. Materials, in fact, account for the largest portion (27.53%) of the iShares MSCI South Africa Index Fund (EZA).

The second largest portion (24.54%) of EZA’s holdings might surprise you - financials. As strange as it may seem for an emerging market, South Africa’s banking industry is one of the world's most stable. Even as banks across the world were crumbling, South Africa’s banks barely experienced so much as a hiccup.

EZA has good momentum and has posted a total YTD return 32%. It can be volatile with the top ten holdings of EZA accounting for 62% of its assets. Its currency is strong even as South Africa’s Reserve Bank has decreased interest rates to an all-time low. Since March, the South African rand has surged 36% against the dollar as its deficit shrank to a four year low of 4.3% of GDP in the second quarter. In addition, political risk has receded somewhat though unemployment remains stubbornly high and crime in urban areas at unacceptable levels.

Perhaps this is why the WisdomTree Dreyfus South African Rand Fund (SZR) has enjoyed consistent growth since its inception. This currency ETF is slightly less volatile than EZA, but still offers nice growth patterns, making it a welcomed long-term holding. The YTD total return on NAV is 23.02% and share price is 25.94%. Not as large as EZA’s returns, but still plenty of room for growth. Another currency ETF with some exposure to the rand is WisdomTree's newest currency ETF, the Emerging Market Currency Fund (CEW), which done well so far.

With precious metals performing better, technical factors pointing to good prospects going forward and many using gold ETFs as a hedge against global financial instability, EZA will get attention as an indirect play on this sector. It is also perhaps the best way to play the ample economic opportunities on the continent. The risk factor is high and EZA can be volatile. Suggest small position and trailing 6% stop loss. For broader exposure to African opportunities and the risks that go with it, consider AFK.

Comments

[Peter Medved:]

"South Africa, surrounded on three sides by water, is a major logistical trading center for oil and other resources and home to aggressive and sophisticated multinationals that are seeking opportunities throughout the continent."

"South Africa is home to ports through which OPEC oil is transported to the U.S. and the conduit through which African oil is transported to China and India."

OPEC oil for US goes as close as 20 miles to South Africa coast & it is certainly not a major logistics centre for energy trade at all. African oil is dispatched from terminals owned & operated by IOCs in the countries where the oil originates.

I have read some of your editorial before Mr Delfeld & have enjoyed it, but you have obviously carried out very little research on this area. Disappointing.

Sep 11 12:51 PM