Although the mainstream media tries to spin it positively, the recent volatility in U.S. markets is a serious concern. Since the beginning of March, the benchmark SPDR S&P 500 ETF Trust (NYSEARCA:SPY) has gone absolutely nowhere. Established international indices are taking their cues from us, making it difficult to seek out alternative investments. However, one sector has weathered the storm fairly well — African stocks.
Right off the bat, we need to establish the fact that African stocks are speculative. Presently, volume is limited due to a lack of popularity and political tensions that have rippled across the continent. With that said, adventurous investors have set their sights on Africa for a number of substantive reasons.
Primarily, African stocks represent the last frontier market. If you tried to sell someone on China as the “next big investment play,” that person will laugh at you. China has been on the news almost on a daily basis, and Chinese financial opportunities are a dime a dozen. But mention the Asian giant during the 1990s, and you’d probably get a quizzical look.
This is the allure of African stocks. The continent really represents the final chance to get on board a China-like investment before it becomes a valuation monster. The facts back up the bullishness.
The African region has nearly 1.25 billion people, making it the world’s second-largest people group. At the same time, the internet penetration rate is less than 28%, the lowest rate globally. With efforts towards education and technological innovation, this rate has the potential to change dramatically. Even a modest impetus could make Africa a serious contender in trade and commerce.
Of course, African stocks have largely been buoyed up to this point by the continent’s vast natural resources. The region is literally and figuratively a goldmine. Unfortunately and inevitably, this has led to a constant scourge of exploitation.
I’m hopeful, however, that with strategies towards open markets, transparent governments, and higher education standards — particularly for women — the entire continent can participate in the global economy under their terms. That, in my opinion, is the true opportunity in Africa.
Here are three African stocks that may provide a rich alternative to the usual.
African Stocks to Buy: iShares MSCI South Africa Index (ETF) (EZA)
Click to Enlarge South Africa is a veritable gold mine. Of the top ten gold deposits in the world, two of them are located near Johannesburg. Together, these two sites combine for nearly 121 million ounces of the precious metal. Thus, it’s no surprise that the mining industry makes up a significant portion of the iShares MSCI South Africa Index (ETF) (NYSEARCA:EZA).
However, the encouraging aspect of the EZA is that it is more than just a play on commodities. The majority of the fund’s exposure is towards the technology sector, followed closely by financial services. That tells me that South Africa is diversifying away from being merely a giant gas station or factory.
However, that’s not to dismiss the nation’s incredible resources. Along with gold, South Africa (along with Russia) control roughly 70% to 80% of global platinum group metals supply. These rare metals primarily consist of platinum and palladium. As well, South Africa produces 80% of the world’s rhodium. Recently, the resource-rich nation has been pumping out chromium to address global supply constraints.
All told, these are incredible tailwinds for the EZA and African stocks in general. This is the reason why I’m not terribly concerned about recent scandals affecting the South African government. It’s certainly not helpful. However, the EZA is up 15% year-to-date, and this is despite the volatility stemming from our own markets.
If you’ve got the stomach to handle some nearer-term choppiness, the EZA has plenty of upside potential.
African Stocks to Buy: Market Vectors Africa (ETF) (AFK)
Click to Enlarge Admittedly, one of the pitfalls of investing in frontier markets like African stocks is getting in too early. The Market Vectors Africa (ETF) (NYSEARCA:AFK) is a classic example. Over the last nine years, the AFK fund has dropped nearly 48%. Part of that is bad timing. The AFK launched in the summer of 2008, right before the financial collapse. The other part has to do with unfulfilled promises.
What makes this period so different? For starters, the technical posture looks encouraging. On a YTD basis, the AFK is up 8%. These aren’t earth-shattering figures, but they confirm the bullish reversal that has been in play since the AFK bottomed in early 2016. Furthermore, the Market Vectors fund is charting what appears to be a bullish pennant formation. If so, that could spell serious upside, and soon.
Granted, African stocks will have to face the challenges of corrupt governments and widespread armed conflicts. However, efforts into modernizing African economies are working. The majority allocation of the AFK is levered towards financial services, followed by basic materials. In third place is communication services. This is a welcome perception shift, and the trend towards a diversified economy should continue to grow.
Bottom line, astute investors are buying into the African opportunity, and the AFK could become a major beneficiary.
African Stocks to Buy: Africa Oil Corp COM NPV (AOIFF)
Click to Enlarge As a frontier market, opportunities in African stocks are extremely limited; hence, the inevitability of mentioning speculative names like Africa Oil Corp COM NPV (OTCMKTS:AOIFF). Because of its status as an over-the-counter stock, AOIFF is the very definition of a thinly traded, high-risk, high-reward gamble. Having laid out these disclaimers, I believe that AOIFF is a smart speculation.
First, the technicals look quite enticing. AOIFF made a pronounced dip in mid-January of 2016. So far, this dip has been the pivot point of a key reversal. Generally speaking, after AOIFF bottomed out, shares have charted a rising pattern of higher highs and higher lows. Currently, AOIFF is near the support line of the trend channel. If the underlying oil markets hit a bottom in 2016, this could be a net positive for the company.
Second, the two nations where Canada-based Africa Oil Corp maintain assets — Ethiopia and especially Kenya — are oil rich. Encouraging results in Kenya could eventually make that country a net exporter of “black gold” in the future. What it lacks right now is the infrastructure to do so. Of course, that could change as larger players start entering the arena.
AOIFF is, like many African stocks, a high-risk venture. Nevertheless, Africa Oil Corp has something to show for it, and it could turn out to be wildly successful.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.