Friday January 28, 3:08 pm Eastern Time
worldlyinvestor.com Fund Talk
South Africa Markets Earn Praise
By Brad Durham, Special to worldlyinvestor.com
Here's the skinny on why many investment managers are high on South African stocks.
A growing list of emerging market fund managers and strategists are looking for South Africa to shake its reputation for
boom-bust cycles and to outperform other global emerging markets this year.
The investment banks HSBC and Morgan Stanley Dean Witter and Templeton Asset Management's Mark Mobius have recently selected South Africa as their
favorite emerging market in 2000.
Mutual funds such as Templeton Developing Markets (Nasdaq:TEDMX - news) fund and Vanguard Emerging Market Stock Index (Nasdaq:VEIEX - news) fund,
as well as the closed-end Templeton Emerging Markets Fund (NYSE:EMF - news), Southern Africa Fund (NYSE:SOA - news), and Morgan Stanley Dean Witter
Africa Investment Fund (NYSE:AFF - news), all have South Africa high on the list of investments.
The overwhelmingly positive feedback is being driven by a range of economic indicators pointing to an export-led recovery spilling over into the domestic economy
that is translating into declining interest rates, upward revisions in economic growth forecasts, and lower inflation than earlier expectations.
The country's politicians are playing along with relatively smooth leadership transitions at the presidential level and at the central bank and advancing policies that are
easing the concerns of domestic and foreign investors.
South Africa's JSE All Share Index set record highs in mid-January, after gaining 30% since mid-October. A little profit taking has brought share prices down a
touch, but the mood is still upbeat for this market to surprise on the upside this year after posting a healthy 49% gain in 1999.
Mobius' Top Pick
Emerging markets trendsetter Mark Mobius recently selected South Africa as one of his two ''biggest calls'' entering 2000 (the other was Brazil) due to the country's
supply of domestic companies that he considers well managed and cheap.
Mobius has increased the allocation to South Africa in the roughly $12 billion in emerging market funds that he manages to 14%, a decisive bet considering the
average emerging market equity fund had an 8% South Africa weighting at the end of last year.
Investors can get overweight exposure to South Africa through the open-end Templeton Developing Markets Fund and the closed-end Templeton Emerging
Markets Fund.
In South Africa, Mobius is currently building his positions in diamond giant De Beers (Nasdaq:DBRSY - news) and mining company Anglo American
(OTC:AAPTY - news).
Hot on the Trail
HSBC is the latest investment bank to make South Africa a top pick among emerging markets for this year. ''We recommend investors hold an overweight position
in South Africa,'' said the bank's emerging markets strategist Ben Rudd. ''We are confident that the market will outperform other emerging markets both in local and,
in particular, dollar terms.''
Rudd's optimism is driven by South Africa's low external financing needs and good risk profile - which combines a strong domestic economy with external factors
such as higher commodity prices and the strong global economy - that he thinks will provide some protection against the expected increase in US interest rates.
A Pure Play on SA
The potential for strong corporate earnings growth is another factor attracting investors. ''South Africa will have good earnings growth this year,'' says Michael Levy,
a portfolio advisor with the Southern Africa Fund, managed by Alliance Capital Management.
In particular, the fund likes high-tech companies such as MIH Holdings and Dimensional Data and is smitten with the consumer sector on the basis of the credit cycle
picking up. A consumer stock that is in the funds' top holdings is Pick'n Pay Stories Limited, which operates supermarkets and cash and carry wholesaling.
The closed-end Southern Africa Fund is organized as a regional fund, but with an 84% country weighting it behaves more like a country fund. It is the most pure play
on South Africa available to US investors, and posted a 72% NAV gain last year.
Pan-African Exposure
Another regional fund with a sizable exposure to South Africa is the Morgan Stanley Dean Witter Africa Investment Fund.
This closed-end fund had 41% of its assets in South Africa at the end of last year and co-portfolio manager Michael Schwabe vows to keep the weighting in the
30%-40% range going forward. The fund has a mandate to make pan-African investments and serves up exposure to South Africa along with sizable allocations to
Egypt, Ghana and Mauritius.
An Indexed Approach
A more unusual approach to South Africa is through the Vanguard Emerging Market Stock Index Fund. South Africa currently comprises 15.2% of the portfolio.
This fund arrives at its large South Africa weighting through its customized version of the MSCI Emerging Markets Free index that heavily favors the most liquid
emerging markets, including South Africa, at the expense of more restrictive markets such as India and Russia.
Other Ways to Go
Other emerging market equity funds with heavier than average exposure to South Africa include the Fidelity Emerging Markets Fund (Nasdaq:FEMKX - news) at
11% and the Merrill Lynch Developing Capital Markets Fund (Nasdaq:MADCX - news) at 10.2%.
Brad Durham is co-founder of www.eMergingPortfolio.com , an Internet site for emerging market investors.
|
