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Africa: Fortune Favors The Brave (AFK, EZA, VX, UL, EEM)

October 19th, 2011

Kevin Kerr: Throughout 2011 the markets have been on an incredibly wild ride for investors. And many traders are left scratching their heads as to what to do next in these volatile times. It’s precisely market conditions like these that offer huge opportunities for those who are willing and able to face the fear and ultimately claim victory over it.

One sector that has been volatile but very resilient lately is the natural resource markets. Almost all key commodities took a swift and sharp downturn in the last month or so, as liquidation ensued by panicked traders. However, the markets recovered just as sharply, as savvy bargain hunters swooped in and grabbed some very discounted opportunities in the commodities.

For example, oil prices recently dipped to close to $74 with many analysts saying oil was going to $60 or even $50, or lower. Instead it did an about face and rose back up close to $90. The same holds true for the gold market, which dipped below $1,600 and then surged back to close to $1,700, with many analysts saying that $2,000 an ounce is still possible in 2011.

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Meanwhile the commodity bears have silently returned to their caves to growl yet another day. Now don’t get me wrong, there is certain to be another round of selling pressure and the inevitable corrections that we always see with every long-term bull market. But the opportunities in commodities for the long-term investor remain solid.

For those who are brave enough to venture into the natural resources, they may be ready to take it one step further …

The Dark Continent with Bright Opportunities

As countries around the world race to secure precious resources for their growing populations, few places offer as much of a variety and abundance of vital commodities than the vast continent of Africa.

The name the “Dark Continent” was more or less created by Sir Henry Morton Stanley, a famous explorer.

Henry Morton Stanley, explorer, adventurer and writer.

In 1874 Stanley started with 356people on an expedition of the Congo. But because of disease and treacherous conditions only 114 survived, and Stanley was the only European who made it. He wrote about his trials in his book Through the Dark Continent.

Now a lot has changed in modern day Africa, but there are still many hazards. And much of African culture still remains a mystery and is frightening to most multi national corporations and individual investors.

For many people, Africa conjures up images of extreme poverty, violent natural disasters, and almost non-existent infrastructure.
There is no doubt there are major problems, after all 70 percent of Nigeria’s 140 million citizens live on less than $1 a day. Congo’s child soldiers fight in what seems to be a never-ending country wracked by violence. Somalia, Zimbabwe, Uganda and more, all suffer from political corruption and vast poverty. So many investor fears are valid.

Even so, much of these conditions are changing rapidly as the investment opportunities in Africa are simply too great to pass up. And China is the one country that sees that …

China Is All In

As the global demand for everything from oil and precious metals to agriculture and soft commodities explodes, Africa’s vast resources are becoming more and more vital, especially to China.
In fact, a whopping one-third of Chinese oil now comes from Africa.

Even though Africa has such vast stores of commodities, the country has been exploited by wealthier nations for many of those resources.

Africa has an  abundance of key commodities scattered around the continent, including huge oil  supplies, diamond and metals deposits, as well as farmland. — Map courtesy of  maps.unomaha.edu
Africa has an  abundance of key commodities scattered around the continent, including huge oil  supplies, diamond and metals deposits, as well as farmland. — Map courtesy of  maps.unomaha.edu

Even so, business is booming right now in Africa thanks mostly to the vast and growing investments by the Chinese.

Trade between African nations and China surpassed $120 billion in 2010. And in the past two years China has given major loans to poor African countries and is investing in everything from major agriculture projects to oil drilling and mining.

According to the Heritage Foundation, estimates are that between 2005 and 2010 about 14 percent of China’s total foreign investment went to sub-Saharan Africa. The fact is that Chinese appetite for resources is voracious. And items like Zambian copper, Nigerian oil, Tanzanian timber, and South African platinum are in high demand.

Chinese investment has paid for extensive roads in Ethiopia; financed the building of numerous schools and hospitals in Liberia; rebuilt Angola’s once-famous Benguela railway; and set up a road-building program in Mozambique.

Chinese investment has already rebuilt large parts of Africa and parts of Africa have much better infrastructure than they did even a few years ago.

Fortune Favors the Brave

So are the political and economic risks in Africa worth it?

Well African companies are some of the most profitable and fastest growing in the world, hands down. And therefore companies and investors who dare to do business in the region stand to profit mightily.

Ironically the very reasons many investors are terrified of investing in Africa — political uncertainty, corruption, poor infrastructure — are some of the best reasons to invest there! Many investors refer to this as the “Africa Discount,” because African companies trade at half the levels of the Western companies.

How to Invest in Africa

Unfortunately, too often perception can interfere with opportunity.

Africa is widely looked at as poor and corrupt, but for those investors who can see past that stereotype they often see that things aren’t as bad as they seem. Africa has pitfalls, but overall it’s simply filled with bargains.

You have economies that are growing 5 percent to 6 percent annually. And it’s routine to find stocks that are trading for 5 to 6 times earnings, which is more or less non-existent in the U.S. market. You can often find banks that are trading for less than even book value. The opportunities are everywhere.

So can you play the opportunities in Africa; there are many ways.

One way to go is to invest in multinationals that already have operations in Africa, such as Nestlé (NESN.VX) and Unilever (NYSE:UL).

There are also several key ETFs to use. The Market Vectors Africa Index (NYSE:AFK) reflects the Dow Jones Africa Titans 50 index, which contains a broad exposure to Africa. And the iShares MSCI South Africa Index (NYSE:EZA) is another. EZA is based on the MSCI index for South Africa, which is the most developed of all African economies.

No matter how you choose to take on some opportunities in Africa, the risks remain, but the rewards could be well worth it. For even more ideas and an extensive analysis of opportunities in Africa, be sure to read the November issue of Global Resource Hunter, you can find out how to get your copy here.

Yours for resource profits,

Written By Kevin Kerr From Money And Markets

Money and Markets (MaM)is published by Weiss Research, Inc. and written by Martin D. Weiss along with Nilus Mattive, Claus Vogt, Ron Rowland, Michael Larson and Bryan Rich. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaMare based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Andrea Baumwald, John Burke, Marci Campbell, Selene Ceballo, Amber Dakar, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau, Jill Umiker, Leslie Underwood and Michelle Zausnig.

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economics.


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