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The Land of the New Gold
Rush Has Glistening +310% Gains |
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Published:
July 7, 2008
When it comes to commodities,
South Africa is in a class by
itself.
South Africa's economy -- the
largest in the fast-developing
continent -- is driven by its
valuable mining and energy sectors,
which account for about 40% of its
stock market capitalization. South
Africa is the world's largest
producer of gold and platinum and
one of the top producers of coal and
diamonds. It's also rich in copper,
iron ore and uranium, among other
metals experiencing rising demand.
Specifically, gold and coal prices
have soared worldwide over the last
few years (although gold has pulled
back lately), boosting South
Africa's trade surplus.
The country also has a solid
manufacturing sector, specializing
in metal-heavy products such as
railway cars. South Africa also is a
net exporter of agricultural
products. Over the past decade, the
nation has benefited from the
dismantling of trade barriers and
from increased foreign investment,
which was curtailed greatly by
boycotts during the last years of
the apartheid era.
Commodities Boom Leads to +310%
Gains
Thanks to
a fast-growing GDP and rising
commodity prices, the South African stock market
has been extremely profitable, which has helped attract
additional capital to fuel
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economic growth. As the chart shows, the FTSE/JSE Africa Top 40 Index is up
nearly +310% over the last five years, outperforming
the S&P by a 7-to-1 margin.
And it looks like the run isn't over as South African stocks have posted
gains of +9.3% so far in 2008, turning in one of the better
market performances
around the globe.
Of course, the South African picture isn't entirely rosy.
The country has suffered from high unemployment and
widespread poverty. It's also facing a
significant electricity shortage, as |
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for years the
government discouraged private investment in new power
plants. In addition, because of high
inflation, South African officials are keeping interest rates
fairly high at 11.5%. Although these lofty interest rates
are great news for income investors, the policy is designed to
rein in the economy.
But even though the country's
economic growth is expected to slow,
it is still projected grow +4.5% in
2008 -- about three times faster
than the U.S. economy. And
considering South Africa's
challenges, the nation's nearly +5%
growth rate speaks volumes about the
power and longevity of this boom.
Furthermore, gold -- driven by
worldwide inflation -- is likely to
resume its upward trend after this
pause. If that happens, South
African corporate earnings will keep
the country's bull market moving
forward.
Economic Powerhouse in an
Emerging Region
Longer term, South Africa is the
financial and industrial center of
sub-Saharan Africa; while this part
of the world remains trapped in
poverty, it's no stretch to imagine
the continent eventually following
the path of other emerging markets
in the post-Cold War era. Western
investment in Africa is picking up
steam, as are efforts to combat
HIV/AIDS and other pervasive health
problems. As the continent's
economic growth picks up, South
Africa will surely be a major
beneficiary.
In short, South Africa is in the
catbird seat of one of the
fastest-growing segments of the
world economy: mining commodities,
particularly gold. In addition, it's
a large developing market with
established industrial and financial
sectors, surrounded by smaller
states likely to experience
above-average economic growth in the
coming years. In fact, the
opportunities in South Africa today
are not unlike conditions in China
not long ago -- on it's path to
become a noteworthy investment
opportunity.
Currency Poised For a Rebound
Note that South Africa's currency --
the rand -- has pulled back -12%
versus the U.S. dollar this year,
making it one of the only currencies
the dollar has gained against. The
main reason for this fall has been
higher-than-expected inflation.
However, with interest rates so
high, it's unlikely the rand will
continue to fall significantly.
After all, big institutional
investors are pouring
ever-increasing sums of money into
South Africa in an effort to profit
from "carry trade" investments. This
strategy -- whereby foreign
investors borrow money at low
interest rates elsewhere and deposit
them in South African bonds at high
interest rates -- should be a
stabilizing factor for the rand in
the coming months. Considering these
factors, it is far more likely that
the rand will appreciate over the
next 12 to 18 months.
South Africa's booming commodity
sector is fueling growth throughout
the country, providing fertile
ground for growth investors. But
income investors will also benefits
from the nation's high
interest rate environment, which is
supporting outstanding yields in
some safe and stable stocks.
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