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Four Reasons Why Africa Is An Attractive Investment (EZA, SPY, EEM, RSX, FXI, EPI, EWZ)

March 14th, 2012

Monty Agarwal:  As investors, most of us have looked in the rearview mirror and dreamed of owning  Microsoft, Google, Apple or Amazon when they were still unrecognized and unloved … long before they multiplied in value and turned their early owners into millionaires, multiple times over.

Nowadays, you may find yourself continually in search of the next Google or Apple. But  the next generation of names that offer both short-term growth and long-term  stability is probably going to come from outside the tech sector … far  outside of it, actually.

But no matter how far away — geographically speaking — the next great investment opportunity may be, the next round of truly big winners it offers is  well-within your reach.


The New and, Perhaps, Last Investing Frontier

While it is not easy to pick potential winning stocks, it is relatively easier to  recognize the potential of an entire geographical region and participate in its  growth.

Take  for example the Asian growth of the past two decades. Investors who recognized  the potential of Asia and invested early in the “four tigers” of Hong Kong, Taiwan, Singapore and South Korea in the early ‘90s, and held patiently, have been richly rewarded.

And now I am seeing a similar opportunity emerging … one that you can start to take advantage of right now.

In the hedge fund circles, there is a classification by geographical markets based on their perceived risk and transparency. There are the developed markets like those of the United States, Europe and Japan.  There are the emerging markets of Asia and Latin America, and there are the so-called frontier markets of Eastern Europe, the Middle East and Africa.

4 Reasons Africa Is an Attractive Investing Destination Right Now

As a hedge fund manager, I have been hearing a lot of chatter recently about Africa (NYSEArca:EZA) among my colleagues … and some of it is downright startling, in a good way.  And I want to share with you four of the major highlights today.

1. Africa Has Been Outperforming Over the Past Decade

The potential for investing in Africa has already begun to be realized. In the past decade, an investment in an Africa Composite benchmark has significantly exceeded the performance of the S&P 500 Index (NYSEArca:SPY), and even outpaced the MSCI Emerging Markets Index (NYSEArca:EEM) on a buy-and-hold basis, as shown below.

2. Valuations Are Attractive

Compared to developed or other emerging markets, African markets and stocks trade at  lower multiples, are less liquid, have lower coverage by Wall Street analysts  and are not followed by large money managers.

But  this is bound to change. And once it does, the valuations will become rich … along  with the investors that take advantage of this opportunity early.

3. Amazing Risk-vs.-Return Metrics

The African market’s ratio of returns to the volatility of those returns, as measured by the Sharpe Ratio, is better than S&P 500, various emerging market indices and even the BRIC Index.

If  you’re unfamiliar with this pricing model, its founder William Sharpe won a Nobel Prize for it in 1990.

This  is a good metric for calculating if you are getting rewarded for the risk you  are taking. By this measure, investors in African markets have been richly compensated … and for lower risk.

4. Steadily Increasing Capital Flows

You’re probably familiar with the tremendous investment potential in Brazil (NYSEArca:EWZ), Russia (NYSEArca:RSX), China (NYSEArca:FXI) and India (NYSEArca:EPI) BRIC countries. But what you may not be aware of is that capital  flows to Africa now exceed those of three of the four BRIC countries.

In summary, money will be made in markets that have the highest economic growth potential. It is clearly not going to be in the Western markets, and it’s  possible that even the Asian markets may have seen the juiciest returns already  made as capital has flooded in and the valuations have soared over the past two decades.

The  next and probably the last frontier for outsized returns is clearly Africa. Over the next decade, more analysts and big-money global investors will undoubtedly discover what the diverse continent has to offer, and investors who invest now will clearly beat the herd.

Please stay tuned, and next week I will bring you more buzz on Africa as well as some of the best ways to invest in Africa.

Sincerely,

Written By Monty Agarwal 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. 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.

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