This year’s FIFA World Cup 2010 hosted by South Africa has prompted numerous sites to look into possible investment opportunities in South Africa and other countries on the African continent. We are not trying to advise on the merits of investing in South Africa but would rather like to point out a few possible avenues one could consider.
As you might have guessed, there are certain ETFs providing some exposure to South Africa and its currency the South African Rand.
The South Africa Index Fund (EZA) by iShares tracks the MSCI South Africa Index with holdings of some of the largest South African companies. Among their top ten holdings are the following firms:
South Africa’s economy is largely driven by raw materials, mining (South Africa is the largest producer of gold, platinum and chromium), agriculture and the banking sector supporting these industries. This ETF’s holdings are therefore skewed towards the sectors directly involved with materials and mining etc. (Click to enlarge)
Another easy option to get some exposure is via the currency South African Rand. You could trade Spot Foreign Exchange, or Futures and Options via the Chicago Mercantile Exchange (CME).
Easier still, try the currency play with an ETF. SZR is the ticker symbol for WisdomTree’s South African Rand ETF. Albeit more volatile than other major currencies, SZR has an added incentive from a positive yield differential compared with the major currencies like U.S. Dollar or Euro. Similar to the Australian Dollar, the South African Rand is also a commodity driven currency and it has profited to some extent from the major bull market in Gold and other precious metals.
There is another ETF tracking the Dow Jones Africa Titans 50 Index offered by Market Vectors Africa Index (AFK). Although South Africa has the largest component weighting with almost 30%, there are many other African nations at play here, most of which would defeat the investment objective i.e. direct exposure to South Africa – not an ideal choice then... (Click to enlarge)
If I was to consider some exposure to South Africa however, I would try a play on one of South Africa’s most revered products, namely gold (GLD). Let's face it, South Africa’s economic achievements are not based on the fact that they have been chosen to host the World Cup but rather that the country has been a leading exporter of minerals, jewels, precious metals and other raw materials, most of which have been consumed up by massive demand from countries like China. The South Africa Index, EZA may be a viable candidate but GLD has been an even better performer particularly because it was somewhat insulated from the credit crisis and the bear market in stocks. The chart below reflects the performance of GLD versus EZA since its inception in 2005. Quite a positive surprise with this comparison is the fact that GLD nearly tripled the returns of EZA but did so with about just half the volatility. (Click to enlarge)
The jury is still out on whether South Africa’s soccer ambitions will pay off. But in terms of giving an investment towards South Africa some thought, I might stick with GLD for now.
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