Van Eck Africa Index ETF
The Dynamic Wealth Report
September 22, 2008
Stay Far, Far Away From This Investment
Africa. The name alone inspires thoughts of great adventure. Tracking
elephant, watching prides of lions roam the grasslands. Some of the
pictures I’ve seen are amazing. I have a few friends who’ve traveled to
Africa and they all rave about a wonderful experience.
What they don’t do however is rave about investment opportunities in
Africa.
That’s why I looked at a new investment product with a bit of
skepticism.
Van Eck Global, a big fund manager, just launched an Africa Index ETF
(AFK). It’s tracking the Dow Jones Africa Titans 50 Index, a grouping of
the 50 largest companies in the region. Sounds simple enough.
But is it a good investment?
I decided to take a closer look at this opportunity. You never know what
you’re going to find. Now, I’ll be the first to admit. Before starting
this research I didn’t know much about Africa. I did however discover
some really interesting data points.
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Did you know Africa:
Accounts for 20% of the world’s landmass but only holds 15% of the
population.
Despite its size, on a global basis it accounts for only 2% of economic
output.
Over the last few years has been growing faster than 6% per year.
Exports mainly natural resources like oil, gas, and diamonds?
Now I know what you’re thinking. Interesting facts, but “So What?”
Here’s why you should care. Some people think Africa is the next China.
It’s set to explode in growth. Investors who are early to the market
stand to make lots of money. Here’s the pitch Van Eck gives (summarized
of course) on why to invest in Africa.
Think about it for a moment. Then, I’ll tell you what I think.
Major changes in the African economy.
The African continent is experiencing some amazing growth. A lot of this
is driven by economic and government reform. The economic growth is
leading to more and more Africans escaping poverty. This allows them to
buy cell phones and automobiles. Some projections have certain country’s
GDP growth to be more than 9.9%. As a comparison the US grows at 2-3%,
in a good year.
Energy and communications are rapidly expanding.
The largest drivers of economic growth are energy infrastructure and
communications. Nigeria alone accounts for more than 36 million cellular
phone users. By deploying advanced communications and energy
infrastructure now, these emerging countries will leapfrog some
developed nations.
Africa holds major reserves of natural resources.
Africa is also home to some incredible natural resources. Commodities
are found in substantial quantities including natural gas, gold, and
aluminum. They’re also a top producer of agricultural products including
cotton as well as crops for the production of alternative fuels. Amazingly, 80% of their exports are natural resources.
Africa has huge amounts of oil
Right now, their most valuable natural resource is oil. With oil prices
above $100 a barrel, the continent stands to benefit from cost effective
extraction and refining. Nigeria hosts one of the world’s largest proven
oil reserves. Other countries have started development of their oil
reserves as well. Oil’s believed to be located in Angola, Sudan, and
Equatorial Guinea, just to name a few.
Major trading partners are China and India
Africa’s working hard to export goods. China and India are the
recipients of more than 10% of their exports. And that number is growing
very rapidly. By some estimates, exports to China are rising by 40% a
year. With major trading partners being the fastest growing in the
world, it will no doubt spur growth on the continent.
Lastly, China’s investing heavily in Africa
China is looking to Africa as a major long term trading partner. In the
last few years more than $12 billion have been invested in
infrastructure development. They’re planning for another $20 billion in
the next 5 years alone. It looks like China’s trying to buy the natural
resource base of Africa. Especially the oil. Seems to be a smart move.
So what do you think? Sounds like an exciting opportunity. . . Right?
Wrong. I’ve got to be honest. I hate this investment.
Let me tell you why.
First off, for all the great things going on in the continent, Africa is
still the Wild-Wild West. Corruption runs rampant. Just ask any major
business trying to work in that geography.
The thought of law and judicial oversight’s a joke. How can you protect
property rights and ensure business ventures aren’t just stolen without
a well developed sense of law. It seems a bit risky to me.
That’s not all. Many of these countries are buried under huge amounts of
debt. They’re living on the edge. Any hiccup in the economy might
shatter their fragile economic structure. If the economy is bad, the
risks to the government increase. It won’t be long before you go from
economic stagnation to full scale civil war.
That’s not all. If you dig into the offering information, the Van Eck
Global Africa Index ETF says it plain as day. “Social and political
unrest may continue to contribute to volatility in the African
marketplace.” That doesn’t sound good to me at all.
Why take on that risk?
There are hundreds of other reasons, but for me, that’s enough.
I can’t think of a worse place to put your money right now.
If you’re curious, the ETF was just started in July of 2008. According
to the latest available data, they have an expense ratio of 1.2% (which
is high) and they have only $5 million dollars under management (way too
low). I wouldn’t be surprised to hear about this fund closing early next
year.
• Home Construction (up more than 31%)
Believe it or not, the home construction industry is the top performer
in the market over the last month. The industry’s posting gains of over
31%. Companies like Standard Pacific (SPF) and
Lennar (LEN) are leading
the group higher. Doesn’t make much sense to me with home values
still falling and foreclosures at record levels.
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