Uncharted Waters: South Africa

South Africa has outperformed other emerging markets over the last six months. But what makes Johannesburg tick as we move out of the World Cup euphoria?

South Africa has a lot going for it. It is far and away the most financially sophisticated economy of southern Africa if not the entire continent, which makes it both relatively easy to invest in and a good proxy for opportunities elsewhere.

It has momentum going for it thanks to the World Cup. And of course it has vast mineral resources in the form of gold, platinum and other metals.

However, the reputation of South Africa as being a gold-drenched paradise is a bit controversial. On one hand, the country’s miners are undeniably digging wealth right out of the ground.

But on the other, South Africa’s rand currency traditionally has a problem with becoming too strong to support the local economy.

Too strong a rand can be a killer for the miners and everyone else in the country when you consider that the commodities South African mines produce are denominated in dollar terms: if the rand appreciates, then suddenly each ounce of gold or platinum becomes less valuable in local terms.

In addition, the country has its share of social problems, including one of the highest unemployment rates (25%) anywhere.


How to trade it

If you like gold, Goldfields (GFI, quote) is a solid way to play bullion prices … even though gold stocks tend to be pretty pricey.

And if you want to get exposure to the 70% of the South African economy that is actually geared toward local services, there are plenty of names out there: phone companies like MTN (MTNOY, quote) and Millicom (MICC, quote) or global financial institutions like Standard Bank (SBGOY, quote)

In terms of manufacturers, you have names like Sasol (SSL, quote) and Sappi (SPP, quote) in the chemicals and paper spaces, respectively.

(SSL is a member of the Emerging Money Index. Think of it as the emerging markets version of DuPont (DD, quote) if you like.)

And then there is Aspen Pharma (thinly traded as APNHY, quote), which is one of the best emerging markets drug companies out there.

Want to just dip in? There is always South African ETF EZA (quote).

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