Light Up Your Portfolio With the Dark Continent
Have you given up on emerging markets?
Lots of investors have – but too bad for them.
Sure, the love affair with the big four – Brazil, Russia, India and China (BRIC) – has lost some of its flame. After all, following a decade of outlandish returns, there had to be a break.
But the story in those countries is only on hold, not over.
In the meantime, investors are courting other emerging regions. One of which has historically been referred to as the “Dark Continent.”
But a little bit of history is necessary. The Dark Continent was so named in the 1800s by explorer Sir Henry Stanley because of its mysterious nature.
And for many investors, the mystery surrounding Africa remains.
The good news is, investors who are invested there are profiting, from dividends and otherwise…
The South Will Rise Again
If you’ve been paying attention to the BRIC countries, over the last few years, you may have noticed a slight modification to that acronym.
Some in the business, including journalists and fund companies, have begun referring to the BRICs as BRICS with a capital “S” – and that “S” stands for South Africa.
You see, South Africa has moved closer to the forefront of emerging market investing for a while, and is considered by some to be one of the more “developed” emerging markets.
And rightly so, because the region has done well.
One look at the iShares MSCI South Africa Index Fund (EZA) over the past few years tells you all you need to know…
From 2009 to 2011, EZA tripled in value, rising from approximately $25 per share to more than $75 per share in 2011.
It’s pulled back a bit since then, and is trading near $62 per share today.
The ETF sports a current yield of 3.61%. That’s almost double the SPDR S&P 500 Index Fund (SPY).
But, most importantly, the growth outlook for South Africa is better than that in the United States, with the IMF predicting that the region will grow by 3.3% in 2014…
Better Growth in the North
On the other hand, the real growth story isn’t in South Africa, but in the northern part of the continent.
Granted, North Africa is rife with instability – let’s be upfront – but the region also has a lot to offer.
In fact, the IMF projects growth in the north to be about 3.7%.
Now these numbers were recently lowered, but that barely affected the share price of funds invested in North Africa.
If your interest is piqued, one fund to look at is the Market Vectors Africa ETF (AFK).
Now, this fund isn’t exclusive to North Africa – it holds 25% of its assets in South Africa. But another 25% is invested in Nigeria, and Nigeria is one of the more promising countries in the region.
(For an ETF invested exclusively in Nigeria, the Global X Nigeria Index ETF (NGE) just launched in April 2013 but, unfortunately, it doesn’t pay a dividend.)
AFK also has holdings in Egypt, Morocco and Kenya. And the U.K., Australia and Canada, as well, but those holdings are limited to companies with operations in Africa.
But just because a fund you’re considering appears to be invested in certain parts Africa, doesn’t mean it actually is. So be careful, because some fund names can be extremely deceptive.
For instance, the SPDR Emerging Middle East & Africa ETF (GAF) seems, going by the name, to be invested in the Middle East and Africa, which one would assume includes North Africa, as well.
In reality, the fund should really be renamed “the SPDR South Africa ETF.” Because right now, almost 93% of its holdings are in South Africa, with only 7% in North Africa. And a whopping 0% is actually invested in the Middle East.
So, buyer beware.
Bottom line: With 25% in South Africa, 25% in Nigeria, the rest spread around the continent, plus the healthy dividend, AFK is a satisfactory way to gain exposure to African growth potential.