Investing in Africa - First buy signal in 22 years !
Stock-Markets / Investing Jan 11, 2007 - 03:11 PM
Twenty-two years ago I told investors to clear out of all investments in Africa. I said, “Don't look back. Africa will not recover from colonialism and apartheid for decades.”
That was good advice. Between 1975 and 2001, Africa's per-capita gross domestic product fell an average of .7% per year. Since I issued that all-out sell signal, Africa effectively became a “lost continent.”
When apartheid fell — even though it was the best thing that ever happened to South Africa — I knew things were going to get worse before they got better. The country wasn't prepared. Its systems weren't ready for the newfound freedoms.
So even when it came to gold mining, I told investors to stay away from Africa. It didn't matter how much gold was there. The economy was so bad, political strife and corruption so intense, that I saw almost no chance of making profits in Africa.
But all that's finally changing. South Africa, in particular, is becoming a nation of growing prosperity. In 2005, the overall African economy expanded 5%, its fastest rate in decades. While 2006 figures have yet to be released, it's expected that Africa as a whole gained about 5.5% for the full year.
There's no question that Africa has a long way to go. AIDS and poverty are still mammoth issues. But I've seen enough data to convince me that things are turning around. And that's why I think Africa could soon become the next big player to enter the world's economic stage.
One reason ...
Africa Is a Direct Beneficiary Of the Global Commodity Boom
As the second largest continent on the planet, Africa covers some 11.7 million square miles and contains 53 countries. And it's also home to some of the largest deposits of natural resources in the entire world.
Together, Nigeria, Angola, Algeria and Libya produce a substantial portion of the world's crude oil. South Africa and several other African countries are a major source of the world's gold output. Botswana and Sierra Leone are major sources of diamonds.
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Africa is also home to some of the world's largest deposits of chrome, bauxite copper, manganese, and uranium. Not to mention tropical hard woods, coffee, cocoa and rubber.
All told, Africa is home to:
- 88% of the world's platinum group metals
- 80% of the world's manganese
- 21% of the world's gold production
- 26% of the world's non-OPEC oil
- 80% of the world's diamonds
So, by my very rough estimates, the commodity boom of the last few years has beefed up Africa's balance sheet by at least $3 trillion. These huge assets now represent a highway to improvement for hundreds of millions of people.
Plus ...
China Has Been Making Big Investments in Africa
If there's one thing that bugs me about the U.S., it's the fact that Washington neglected the huge strategic importance of Africa.
Had we been there to help Africans after apartheid ended, not only would we have helped lots of impoverished people, we would have set the stage toward ensuring supplies of natural resources for the U.S.
But alas, Washington basically stayed on the sidelines. And now, while the U.S. is focused on the Middle East, North Korea and terrorism, it's missing the boat.
China, on the other hand, is locking up one deal after another in Africa. In the last two years, it's become Africa's most powerful and strategically. China has:
Forgiven more than $1 billion in debt owed by 32 African countries
Become Africa's largest trade partner, with trade growing 400% over the last six years (while Africa's trade with Britain, France and the U.S. continues to shrink)
Become the continent's largest foreign investor, recently offering $3 billion in low-interest rate loans and another $2 billion in export credits over the next three years.
Indeed, at the recent forum on Chinese-Africa Co-operation held in Beijing this past November, figures were cited showing that trade between China and Africa rose to $40 billion in 2005 from $4 billion in 1995. And Beijing authorities announced that they expect trade to rise to $100 billion over the next three years.
Moreover, in the past 12 months, at least 16 mega-contracts have been forged between Chinese firms and African governments. Four of them:
1. A copper mine in Zambia and a $230 million chrome mine and smelter in South Africa
2. A $2 billion oil-backed loan to the Angolan government
3. A $1.3 billion deal between the China Machine Building International Corporation and Zimbabwe to build a major coal mine and three power stations in the country
4. A $2.5 billion oil deal with Nigeria
To be sure, China's government, which has one of the worst human rights records, is more interested in Africa's huge natural resources than its people.
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But it's a step in the right direction for Africa. With more money and foreign investment, plus huge gains in the value of Africa's gargantuan natural resources, Africa has a greater ability to make huge strides forward.
Investor Interest in Africa Is Picking Up: How You Can Invest in the Continent
Volume on the Johannesburg Stock Exchange is up 600% over the last decade. The value of listed companies on the exchange has surpassed $650 billion, making the JSE the world's 17th-largest exchange (and Africa's biggest).
As Africa's economic growth accelerates due to rising commodity prices and foreign direct investment, investor interest should rise substantially in the years ahead.
The best part is that American investors are getting more and more ways to participate:
A slew of new American Depository Receipts (ADRs) of African companies are coming out. These stocks are traded on U.S. exchanges, but are essentially the same as buying their foreign-listed counterparts.
Plus, mutual funds are allocating more capital to Africa. For example, several natural resources funds now hold significant stakes in the continent.
And exchange-traded funds are also helping investors track different countries. For example, you can purchase the iShares MSCI South Africa Index Fund (EZA). Its 52 holdings give you a broad stake in South African companies, including names like Gold Fields, Ltd ... Impala Platinum ... Anglo American ... Harmony Gold Mining ... and Sasol, Ltd, one of the leading alternative energy companies in the world today.
My view: Africa is just beginning to emerge on the world scene. It will take decades for it to come anywhere close to the level of economic development we see in, say, India, let alone the typical emerging market.
But those investors who get in now, while Africa is still largely ignored, stand to make bundles of money. It's been more than two decades since I issued my sell signal on Africa.
Now, I'm officially giving my buy signal, a green light to go ahead and start investing in Africa. I'll have more details in an upcoming issue of my Real Wealth Report .
Best wishes,
Larry Edelson
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