African ETFs- A Diamond In The Rough

As the world seeks natural resources and economic growth, Africa’s economy may continue to witness expansion enabling the Market Vectors Africa Index (AFK) and the SPDR S&P Emerging Middle East & Africa ETF (GAF) to reap the benefits.

According to a report by McKinsey & Company during the eight year period from 2000 to 2008, the world’s second largest and second most populous continent witnessed a compound economic growth rate of 4.9 percent.  Although this growth is not as great as that witnessed by emerging Asia, it superseded that of Latin America and Emerging Europe.  Furthermore, even the poorest region of Africa witnessed GDP growth of 4.8 percent between 2004 and 2008.  Lastly, the report indicates that even though the overall global economy shrank by 2 percent in 2008, Africa actually grew by 2 percent during the same period. 

A major reason that Africa has witnessed this growth and is likely to continue to grow is its abundant supply of commodities and natural resources.  On the energy forefront, Africa has nearly 16 billion metric tons of proven crude oil reserves and nearly 500 trillion cubic feet of gas reserves.  Additionally, the continent has 90% of the world’s cobalt, 90% of its platinum, 50% of its gold, 98% of its chromium, 70% of its tantalite, 64% of its manganese and one-third of its uranium.  Furthermore, Congo has 70% of the world’s coltan, which is found in nearly all of the world’s mobile phones, and is home to more than 30% of the world’s diamond reserves. 

A second driver behind Africa’s growth and its potential growth is foreign direct investment, in particularly from China and India.  China has poured a boat load of money into the region providing educational support, health support and military aid to numerous governments.  Additionally, India has structured alliances within Africa to utilize its abundant supply of energy resources.  In fact, it is expected that trade alone with China could exceed $100 billion this year alone.

Lastly, political stability in relative terms has improved throughout the region leading to increased property rights, access to capital and increased public investment in education and health services.

Although a combination of the aforementioned forces has enabled Africa to achieve economic success and has positioned the continent to grow in the future, it is equally important to keep in mind the risks that come with investing in Africa. 

Some risks to be mindful of that could devastate the overall economic growth of Africa include failed central planning, frequent tribal and military conflict, the spread of deadly diseases and viruses, malnutrition and an inadequate water supply and supply of food. 

To help protect against these risks, the use of an exit strategy which identifies when downward price pressures are likely to prevail is important.  Such a strategy can be found at www.SmartStops.net.

As for the Market Vectors Africa Index ETF, it seeks to replicate an index consisting of publicly-traded companies headquartered in Africa or that generate a significant portion of revenues in Africa. It allocates 29% of its holdings to, banks followed by basic resources (19%), telecommunications (12%) and oil and gas companies (11%).

In regards to the SPDR S&P Emerging Middle East & Africa ETF, 76.25% of its assets are allocated to Africa with 28.9% of its assets allocated to financials, 20% to materials, 13% to healthcare and 9% to consumer discretionary. 

Disclosure: No Positions

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