South Africa: A Resource-Rich Emerging Market in the Spotlight

Jun. 7.10 | About: iShares MSCI (EZA)

With less than a week left to the start of the World Cup, South Africa is on the minds of billions of soccer fans around the world. In addition to hosting one of the largest sporting events in the history of the world, the most southern African country also might be an excellent investment opportunity.

The World Cup, a month long soccer event, means a lot to the people of South Africa, which is the first African nation to host the World Cup. In fact, the President of South Africa, Jacob Zuma described 2010 as “The most important year in our country since 1994” mainly as a result of hosting the World Cup and the connotations that come along with it.

The World Cup will benefit South Africa’s economy and industries. South Africa is a land of plentiful resources. In particular, its precious metal and hard commodity industries are certainly areas that investors, both individuals and institutions alike, should be privy to.

It is my belief that South Africa will prosper economically as a result of not only the positive externalities associated with hosting a World Cup, but also due to its abundant resources in the form of precious metals and other commodities. According to the article “The Price of Freedom” from The Economist, “It [South Africa] has fabulous mineral wealth, with 90% of the world’s known platinum reserves, 80% of its manganese, 70% of its chrome and 40% of its gold, as well as rich coal deposits…”

As a result of South Africa’s huge commodity reserves, I recommend being long South African equities with commodity and precious metal exposure. As the sovereign debt crisis continues to rage around the world, the flight to quality from debt and equity securities to hard commodities has been pronounced. The recent run up in gold prices to over $1200 an ounce points to the increased demand for tangible assets. In addition to short term demand for hard commodities, the long term demand for these assets will also be significant.

Over the past two years, central banks around the world have kept interest rates at historic lows as a result of the credit crisis. One long term effect that this action might have is that inflation might heat up very quickly once economies start to grow again. If this were to occur, the price of hard commodities such as gold and platinum would increase because there is generally a positive relationship between inflation and the price of commodities. Were this to happen, precious metals and commodities firms would stand to make windfall profits, and a lot of that supply would come from the mineral mines of South African companies.

For that reason, there is a staggering amount of growth potential for companies such as AngloGold Ashanti Ltd. (NYSE:AU) or Gold Fields Ltd. (NYSE:GFI), two of the world’s premier precious metals firms which are both headquartered in South Africa.

AngloGold Ashanti Limited is a global gold mining company based out of Johannesburg, South Africa. AngloGold trades in the States on the NYSE under the ticker AU and has mining operations in South Africa, Australia, and Brazil, among others. AngloGold is already one of the biggest gold mining companies in Africa, and I strongly believe that as the demand for gold increases globally for myriad reasons, so will the financials and stock price of this company going forward.

Gold Fields Limited, which trades on the NYSE under the ticker GFI, is another gold producer based out of South Africa. The Sandown, South Africa-based company engages in the exploration, extraction, and processing of gold in namely South Africa, Ghana, and Australia. Due to this company’s vast exposure to the gold complex, I would recommend this company as a buy based on its fundamentals and long term growth potential as gold prices continue to rise.

For those who are looking to diversify and at the same time bet on a World Cup economic bump to the South African economy in the aggregate, take a look at the iShares MSCI South Africa Index Fund. This is an exchange-traded fund that trades under the ticker EZA. It is quite a diversified fund with positions in 45 of South Africa’s strongest companies from financial services giants like Standard Bank to precious metals firms like my pick, Gold Fields Limited. Additionally, another benefit to owning this fund is the cost, with an expense ratio of 0.66% it is suitable for both institutional and individual investors alike.

South Africa is a land of plentiful natural resources and in particular, precious metals. Hosting the World Cup and the resulting improvements in infrastructure and added tourism revenue will be a short term catalyst to propelling South Africa into a new era of long run economic growth on the road to becoming a developed economy.

Disclosure: No positions