Mary Daniel's  Instablog

There are many good things about South Africa right now that make it very appealing to offshore investors.  South Africa’s economy dominates the African economy in each and every arena.  Sure, South Africa was one of the last to feel the ripple from the global economic fallout.  What this means to investors is that South Africa has just barely begun the recovery process.  And with the government already promising $98 billion to infrastructure, it is easy to speculate high economic growth from this region in the near future.

Over the past few years oil has been the most volatile commodity on the market.  However, oil is always in demand.  Thus, transportation of this commodity is an ongoing process.  Oil is transported around the world mostly by boat.  South Africa is surrounded on three sides by water.  South Africa is home to ports through which OPEC oil is transported to the U.S. and also through which African oil is transported to China.  South Africa is geographically essential to the transportation of the world’s most precious commodity.

One occurrence that has been noticed recently is that every time oil goes up, South African steel increases as well.  Highveld Steel and Vanadium Corporation ADR (HSVLY) greatly outperforms the industry with an EPS growth of 167.2 on a three-year average.  And with a current price of just $9.60 this stock would make a great addition to any portfolio.  This occurrence creates an interesting market relationship.  With mining turning up big business in South Africa and the government putting up big funds for construction, 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).  This fund speaks for itself with 100% of its holdings directly in South Africa.  EZA boasts a total YTD return on NAV of 31.65% and share price of 31.89%, which makes this a highly recommended intermediate-term holding.  It also speaks well for this ETF that it trades, on average, extremely close to the actual value.

The second largest portion (24.54%) of EZA’s holdings is financials.  As strange as it may seem for an emerging market, South Africa’s banking industry is one of the worlds most stable.  Even as banks across the world were crumbling South Africa’s banks barely experienced so much as a hiccup.  Personally I find it favorable that this is not a consumer-driven economy.  It will serve to keep South Africa consistent for years to come.  Just like other countries have done, South Africa’s Reserve Bank has decreased interest rates to an all-time low.  But consumer spending in this country has not changed.  That brings us to another positive factor, the consistent growth of the South African Rand.  Minimal changes in internal supply and demand mean that the currency is not as susceptible to fluctuations in exchange rates.  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 yet still boasts amicable 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.  Also, the South African Rand is included WisdomTree's newest currency ETF, the Emerging Market Currency Fund (CEW), which experiences equally consistent growth.

Another factor that makes South Africa appealing to investors is the stable political climate.  Let’s face it, South Africa rarely makes the news these days.  But let’s not overlook the fact that it is ripe for investment.  Government spending is up.  Consumer spending is flat.  The financial sector is one of the most stable in the world.  The political climate is stable.  This is a product-based economy with GDP primed for a rise.  The timing has never been better to invest in this emerging market on its recovery upswing.

Disclosure:  No positions