This ETF Bets on Big Profits Out of Africa
07/21/08 - 09:29 AM EDT
Roger Nusbaum
The most important bet here is whether money is now flowing into the continent, and if so, whether that will continue. It seems assured that foreign investment will continue. Emerging/frontier market ascendancy has led to huge stock booms in those countries this past decade. Africa would seem to be lining up for the biggest modernization and quality-of-life improvements of any other investment destination.
Unfortunately, there are also social issues, such as violence and corruption, in various parts of Africa that could hinder success or bring objections from some people who take into account social responsibility. The investment risks are vast. Over a 20-year period (there must be a long-term perspective applied to this theme), there will be booms, busts, bubbles, corruption, wars and other problems as the continent tries to modernize. In a way, there must also be a short-term perspective applied to this theme. It would not be a big surprise if at some point the fund went on, say, a four-month tear up 50%. When the market offers one of those, it will make sense to sell, or at least reduce the position. A market that can go up 50% in a few months could easily decline just as much just as quickly. At the top of this article, I joked about yet another frontier market -- but in fact, the dynamics that move Africa will be very different from the dynamics that move the PowerShares MENA Frontier Countries Portfolio(PMNA Quote - Cramer on PMNA - Stock Picks), which invests primarily in the Middle East, or the Claymore/BNY Mellon Frontier Markets ETF(FRN Quote - Cramer on FRN - Stock Picks), which is heaviest in Poland and Chile. I wouldn't be surprised if, six months from now, we see that the correlation numbers of the three are quite low. While I would not allocate more than 4% or 5% to frontier markets in total (I have 1% allocated to Vietnam for a few accounts), I think an investor could allocate to all three without much overlapping effect.
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