A Diamond in the Rough

Nine official African language groups and a wide mix of peoples have led South Africans to dub their homeland the "Rainbow Nation." It's a country rich in natural resources, which themselves include a rainbow of precious metals and gems, from gold to platinum to diamonds. The iShares MSCI South Africa Index Fund (NYSE: EZA  ) , which has posted a 31% return since its inception in 2003, offers a convenient way to access that rich potential.

Fund facts

  • Inception date: 2/3/03
  • Expense ratio: 0.68%
  • Net assets: $524 million

Fund specifics
The iShares South Africa fund tracks a cap-weighted index of South African stocks. The fund holds more than 50 securities, with top holdings including mining and energy company Sasol (NYSE: SSL  ) , communication-services company MTN Group (OTC BB: MTNOY.PK), and platinum producer and supplier Impala Platinum (OTC BB: IMPUY.PK). Materials stocks make up about a third of the fund's portfolio, followed by financials and telecom stocks.

Economic outlook
South Africa is the world's largest producer of gold and platinum and exports a significant amount of coal and diamonds. The country had been riding the wave of global growth in demand for materials, but lately, the sailing has not been so smooth. It's starting to experience some growing pains, the largest being electricity shortages. Production at South Africa's platinum and gold mines has stopped periodically when the state-owned power utility, Eskom, has been unable to meet demand. These regular and, at times, lengthy blackouts are the direct result of underestimating recent economic growth, and the outages have been severe enough to shut down mines for days or months. Those shutdowns, in turn, roil the stock and currency markets.

An unemployment rate of 25% and an extremely high poverty rate have also put a burdensome load on South Africa's economy. In the political arena, the country is preparing for a new president when current leader Thabo Mbeki steps down. One likely successor, Jacob Zuma, was recently named head of the ruling African National Congress party and has been charged with allegations of fraud, money laundering, and tax evasion.

Does it belong in your portfolio?
Because the iShares South Africa fund is a single-country ETF, there are a number of risks. Along with typical market hazards, the fund is exposed to the nation's political risks, along with substantial exposure to price fluctuations in worldwide natural-resource prices. There's also the potential for environmental problems that are common to extractive industries.

In the short term, electricity shortages are likely to continue, and that will dim South Africa's economic potential. If you already have an investment allocation for the natural-resources sector, investing in this fund might raise your risk level beyond your comfort zone.

In the long run, however, South Africa is a bright light in the African continent, with a vibrant developing economy. The fund's exposure to several highly sought-after resources makes it worth keeping an eye on.

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  • Report this Comment On January 13, 2009, at 1:43 PM, Rolandos wrote:

    The value of platinum is evidently determined by cars and jewellery.

    Rumour has it that Mazda produced an auto mobile engine that requires less Rhodium, as a catalytic converter, than is customary; much less.

    Seems like South Africa, rich in Platinum, has had its goose cooked by THE ANGLO AMERICAN CORP.

    AngloPlats, from first-hand knowledge, budgeted and appropriated billions on at least four platinum-processing plants in the last four years, in South Africa, only to see Platinum value recede realistically, by approximately 45%; America's credit market notwithstanding.

    Around 1987, platinum was twice the price of gold _ i.e., approximately 2 to 1, folks; this was normal. Today the ratio is, "Unreal." However, Platinum stands at Approximately 1 000 US D: going back to normal, it would seem.

    Moreover, related platinum-processing project management, which in the R.S.A. is nothing less than fragile, responded in more than worrying job losses through panic. This must be serious, folks.

    Nevertheless, R.S.A. has many other investment opportunities for the hesitant investor; by which I mean, the Worlds economy, which evidently rotates around the Bank of England _ check it out _ where South Africa is concerned, has much, much more than Platinum: It has the s(up)port of F.I.F.A. _ whoopee.

    South Africa is not a "Dead duck;" far from it. The opportunities for the o-s investor shall be bolstered by A.A.C. come what may. It does, after all, own the richest precious-mineral reserve on the planet.

    Amandla... whatever.

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