A Bright Market on the Dark Continent - TheStreet

This year has not been pretty for emerging markets around the world. Nowhere has this been more true than Africa.

The continent has endured regional conflict in the Congo, a horrible civil war in Sierra Leone and unsettling state-sponsored terrorizing of white farmers in Zimbabwe. The optimism felt when

President Clinton

made the first visit to Africa by a U.S. president while in office -- and promised new trade and economic ties -- has dissipated.

The turmoil in Africa, combined with anxiety over interest rate hikes in the U.S. and a potential global economic slowdown, have caused a sharp drop in South Africa's market, the only country of real interest to investors in the region. The benchmark

Johannesburg All Share

index climbed 42% between last October and mid-January. It then began tumbling and by mid-April, it had dropped 28% from the peak. Since then, however, it has begun climbing back, and is up 15% from the recent bottom, although it is still off for the year.

This is tempting some to take a second look at South Africa.

While the pickings aren't huge, U.S. investors have a number of ways to play the South African market. There are seven South African companies that list in the U.S. through American depositary receipts, according to

ADR.com. They are mostly resource companies, such as mining giant

De Beers Consolidated Mines

(DBRSY)

but the list also includes

South African Breweries

(SBWUY)

. One intriguing South African ADR is petrochemical firm

Sasol

(SASOY)

. High oil prices have boosted the stocks of many oil companies, but Sasol has been passed by. It has dropped 21% for the year, and is a bargain, believes Cape Town-based Jos Gerson, chief economist for South Africa at

Merrill Lynch

.

There are no South African-only mutual funds, but there are two

closed-end regional funds that focus on the country. The

Southern Africa Fund

(SOA)

contains 80% of its holdings in South Africa. It is down 32% from its peak in January, but has climbed 8% the last two weeks. The

Morgan Stanley Dean Witter Africa Investment Fund

(AFF)

has 40% of its holdings in the country, the largest country allocation in the fund. It is also down 32% since January, and has climbed 6.5% in the last two weeks.

Barclays Global Investors

has plans to release a an exchange-traded fund that tracks the

Morgan Stanley Capital International South Africa

index, known as

iShares MSCI

, this summer. (For more on iShares MSCI, see my

May 19 column.)

In addition, some broader emerging-market mutual funds invest in the country. In particular, South Africa has long been a favorite of emerging markets guru Mark Mobius. His

(TEDMX) - Get Report

Templeton Developing Markets fund contains a 10% weighting in South Africa. It is down 16% this year, requires a $1000 initial investment, and carries an expense ratio of 2.11%.

I know, I know. The consensus about emerging markets is they are dependent on growth in the U.S. and other industrialized economies. If the

Federal Reserve

can't engineer a soft landing, they'll be in bad shape. This is especially true for a resource- and commodity-based economy like South Africa's. Their growth depends on the ability to sell raw materials like coal to industrial economies.

However, there are a number of reasons to be interested in South Africa. It has a relatively strong macroeconomic situation, with expected GDP growth of around 4% this year and strong growth forecast again for next year. Inflation is a concern, as well as volatility in the currency, but earnings growth of South African companies is solid, 25% to 35% over the next 12 months. There are a lot of bargains out there.

Of course, South Africa faces a big investor confidence problem as a result of the situation in Zimbabwe, where a serious conflict over ownership of farms has led to the killing of white farmers, a situation irresponsibly encouraged by

President Robert Mugabe

.

"We've been clouded in a deluge of Afro-pessimism," says Johannesburg-based Gordon Smith, chief economist for South Africa at

Deutsche Bank

. The situation in Zimbabwe is "tough to counter since it gets embroiled in investors' worst fears" about investing in Africa, he says.

South Africa is not Zimbabwe. While there are land ownership issues in South Africa, it is unlikely those issues will get as heated or violent as in Zimbabwe. And from an economic standpoint, Zimbabwe's collapse means little to South Africa, whose largest trading partners are in Europe and Asia.

South Africa, like all emerging markets, is a tough call right now. The market has probably been oversold. The continent's problems may scare away the timid, but that leaves more opportunity for the bold.

David Kurapka's Global Portfolio column appears Wednesdays and Fridays on TSC. In keeping with TSC's editorial policy, he does not own shares in any companies or mutual funds mentioned in this column. He also doesn't invest in hedge funds or other private investment partnerships. He welcomes your feedback at

dkurapka@thestreet.com.