Overnight emerging markets continued the rally started Monday on speculation the European Central Bank (ECB) could be getting ready to buy Spanish and Italian bonds to help reduce borrowing costs for the two debt-stricken countries.
Emerging markets in Asia opened for the first time since the U.S. economy reportedly added more jobs than expected and rallied at the open. Adding strength to markets were comments from China’s central bank indicating it will tactically adjust monetary policy as needed on any concerns of weakening economic data.
Overnight emerging markets trading was interesting to say the least. With multiple straight down sessions in a row and Japan’s NIKKEI suffering the most — five straight sessions to the downside — market participants began to pick through the rubble after strong earnings from Caterpillar (CAT, quote) and Boeing (BA, quote).
Gold has been volatile lately as global economic issues and a strong dollar compete to set direction in the metal.
Last week’s coup d’etat in the landlocked, West African nation of Mali sent gold stocks with exposure to the country tumbling. Africa’s third-largest gold producer, Mali had been an example of a thriving African democracy with budding but effective institutions.
For much of the last decade, rising commodities prices have boosted the economies of the emerging markets, attracting investment and jobs and allowing those countries begin growing their own middle-class consumers.
Gold is back at a record peak and stocks in South Africa are flying to six-week highs as a result.
With an M&A run rate of $54 billion from Marakesh to Johannesburg, African companies are having a great year. We discuss the opportunities on CNBC’s Trading the Globe this morning.
If you are looking for double-digit earnings growth at single-digit valuations, Africa is one of the last remaining places on Earth that you will be able to find it. Local companies benefit from strong consumer demand and investors benefit from high dividend yields.
In fact, African mutual funds and ETFs have seen investors pump a record $610 million into their portfolios so far this year.
But those flows can conceal a relative lack of variety in the individual African stocks that U.S. investors can buy.
There are only 88 ADRs to cover the entire African continent — one from Zambia, three from Egypt and the rest from South Africa.
South Africa is of course a very exciting economy, contributing 17% of all of Africa’s total GDP, but getting exposure to the other 83% of the continent is difficult.
You can simply buy into the Africa ETF AFK (quote), which is up 17.8% so far this year.
However, even AFK has trouble investing its entire portfolio on the continent itself. About 30% of the fund’s assets are in South Africa — companies like AngloGold (AU, quote) and Old Mutual (ODMTY, quote) — and another 19% are in Egypt, largely in ORSTF (quote) and ORSDF (quote).
Another 30% comes from Nigeria, Morocco and Kenya, where retail exposure is very hard to come by.
But the remaining 21% represents “offshore” exposure to African markets — global companies that do business on the continent, but are not actually African stocks!
The World Cup is upon us, so as the world watches South Africa, we talked about the country’s unique investment proposition this week on CNBC’s Trading the Globe.
South Africa has spent about $5.5 billion to build stadiums, roads and high-speed trains as part of its overall program of preparing to host the World Cup this month. The government hopes that a higher global profile will help the country attract about three times that much in direct foreign investment.
Many investors still think about South Africa in terms of gold, and many of the world’s great precious metals names trade on the Johannesburg Stock Exchange: Gold Fields (GFI), RandGold (GOLD), Harmony Gold (HMY), AngloGold Ashanti (AU). With gold trading around record levels, these stocks are obviously in the spotlight.
While the country mines gold for export in the form of its famous krugerrands, it also has a developed domestic industrial and consumer economy.
Sasol (SSL) is one of Africa’s biggest oil companies and has an interesting chemical business as well.
Naspers (NPSNY) is a global media conglomerate. Standard Bank (SBGOY) is one of the great emerging markets financial groups. MTN (MTNOY) is a huge cellular network, while Millicom (MICC) also does a lot of business in South Africa.
For exposure to South Africa, the iShares ETF (EZA) is a great start. The portfolio is remarkably balanced — only 22% of its holdings are in gold miners — and offers U.S. investors a chance to buy into many consumer names that do not trade here.
More advanced traders can also work with the South African rand via the currency ETF SZR. The rand is often an interesting contrarian play because it is so closely associated with gold.
Volatility is spiking again today. Practically all of the major ADRs we track are down 3% to 6%. Global gold miners are emerging as the scattered pockets of resistance.
The VIX, the so-called “fear index,” has popped close to 13% this afternoon as traders confronted with shifting economic expectations and gnawing worries about sovereign contagion retreat to the sidelines.
All major Brazilian ADRs and just about all the Indians, even those that track companies that are releasing great earnings, are getting pounded. As capital flees to the dollar, oil prices are declining, which is putting extra pressure on Russian ADRs. Only Polyus (OPYGY) is up on that end of the market — and it’s surging 4%.
Other bullion names like ABX are up about 2%, roughly in line with the price of gold. But even here, the gains are uneven. South African miners like HMY and GFI are lagging but positive; AU is down on the day.