Investors in SANE states: keep calm and carry on

AT the start of the year, investment opportunities seemed aplenty for those seeking exposure to Africa. The London Stock Exchange announced that the HSBC MSCI South Africa ETF, launched yesterday, brought the total number of London-listed exchange-traded funds (ETFs) based on emerging market indices to 75.

South Africa, Algeria, Nigeria and Egypt find themselves following the Piigs and the Brics in the current trend for multinational groupings. Collectively they are home to 70 per cent of Africa’s largest companies, all of the top 50 banks, the target of more than half of all foreign investment and holders of more foreign currency reserves than the rest of Africa combined,

However, all has not gone to plan for the continent. With civil unrest sweeping across the north coast, and regimes seemingly tumbling like dominoes, predictions of the emergence of African economies took a large dent. The political wildfire sparked first in Tunisia and spread around the region and into the Arab states. The largest political bonfire was in Egypt, but the flames of protest were fanned deeper into the continent to Sudan, sub-Saharan Africa’s largest country, which is set to split in two in July, with anti-government protests continuing to rage across the country.

In contrast, of the SANE grouping, South Africa looks the most attractive proposition. 2010 saw it ride the wave of rising commodity prices and their export sector has flourished thanks to comparative freedom from the high tariffs and big government intervention that hold back other African nations. Despite this, there could be trouble on the horizon for South African unity. Nelson Mandela is now 92 and in frail health, and the ANC party do not have the dominance that it once had.

With such instability in the continent, why should emerging market ETFs be a target for investors in the long term?

Farley Thomas, head of ETFs at HSBC said in support of emerging markets: “With investors eager for growth and income it seems very likely they will be attracted to these sometimes overlooked but quite dynamic economies that are perhaps worth investing in for the long term.”

“South Africa is one of the bigger economies within the emerging markets universe. It has an abundant supply of natural resources alongside well-developed financial, communications, energy, and transport sectors. The HSBC MSCI South Africa ETF aims to provide investors with high quality and good value access to this potentially high growth story.”

Though it is easy to make the case for a South Africa fund, there are also those that believe that the events in Egypt and beyond will be a good thing for long term investors seeking exposure to Africa. Citadel Capital, based in Egypt, takes the view that the difficult period experienced in January and beyond will result in a more stable and faster-growing Egypt and region, with compelling opportunities for long-term private equity investors in Egypt and beyond.

With Market Vectors’s Africa Index ETF tracking above its South African fund for the first time in 6 months, we may well see more SANE-targeted ETFs hit the market, allowing smart investors to expose themselves to diverse commodity rises across the continent. If they are prepared to weather the storm and take a long-term view on African investment, there could be rich pickings for those prepared to take the risk.