Published:
August 18, 2008
OK technically speaking, there are no tigers in Africa. But
there are many fast-growing companies that investors can now
easily access with Market Vectors Africa ETF (NYSE: AFK,
$37.94). Some of the markets AFK invests in, such as South
Africa, are considered emerging markets rather than frontier
markets. Nonetheless, AFK offers the most concentrated exposure
of any fund to the frontier markets of Africa. And all of the
markets in the fund certainly share the frontier characteristics
of high economic growth and the potential for large returns.
AFK invests in the stocks of the Dow Jones Africa Titans 50
Index. These are all stocks of companies either based in Africa
or that derive more than 50% of their revenues from Africa.
Stocks from Nigeria, South Africa, Egypt and Morocco take the
top weighting in the fund, making up close to three quarters of
the portfolio.
Africa remains one of the world's poorest regions. According to
Van Eck, the manager of AFK, the entire continent has 15% of the
world's population but only accounts for 2% of global GDP.
Nonetheless, the region is seeing major economic improvement. On
average, sub-Saharan African grew at a near +7% pace in 2007,
and growth has remained above +6% in each of the past three
years.
Some of this improvement is due to exposure to energy and
mineral commodity markets. Africa is among the world's top
producers of gold, platinum, uranium and diamonds. In addition,
some countries such as Nigeria and Angola are becoming important
and fast-growing suppliers of crude oil. And money from natural
resource exports is stimulating other sectors of the African
economy..
There are other reasons for optimism, too. Corruption and social
instability have been a problem in many African nations and
remain a major issue for some countries in the region. However,
many nations are making progress in this area. Botswana is a
classic example.
This tiny nation of 1.8 million is a rich source of diamonds --
the government-owned diamond firm partners with foreign
companies in developing resources. Those resource monies have,
in turn, been spent on badly needed infrastructure and
development projects. In addition, the government in Botswana
has taken steps toward free-market reform, including lowering
barriers to trade and a responsible fiscal policy.
Finally, foreign investment into Africa is booming. Taking into
account direct investment by companies, investment funds and
loans, private monies flowing into Africa topped $50 billion
last year -- up from just over $10 billion in 2000.
AFK listed earlier this summer and thus has a limited trading
history. However, the Dow Jones Africa Titans 50 Index offers
exposure to the largest companies in some of the most promising
African markets. The average P/E ratio of the stocks in the
index stands at just under 22, but the average 2008 growth rate
projected for AFK's top five holdings is more than +20%; that
valuation looks justified by the growth prospects.
Moreover, AFK looks like a decent diversification tool for
U.S.-based investors. The fund's correlation with the S&P 500 is
under 0.25.
With the exception of South Africa, none of the countries where
AFK invests have stocks trading as ADRs in the U.S. Furthermore,
buying stocks off the African exchanges would require finding a
local broker as no U.S. brokers handle trades there. Thus, AFK
is one of the only ways for U.S.-based individual investors to
play the African growth story.
Paul Tracy
Editor
StreetAuthority
Market Advisor
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Virginia, has appeared as a guest expert on several prominent financial radio
shows, and has been a featured speaker at various investment conferences across
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Paul graduated with a B.S. in Finance and Management from the McIntire School
of Commerce at the University of Virginia.
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