Funds Get a Boost from Africa, Mideast

NEW YORK (TheStreet) -- One of the hottest performers this year is Nile Pan Africa Fund ( NAFAX), which has returned 26.7% and outpaced the S&P 500 by 14 percentage points, according to Morningstar. Part of the reason for the strong showing is that many countries in Africa and the Middle East are booming.

Boosted by high oil prices, petroleum producers are enjoying some of the best results. Last year Saudia Arabia's economy grew 6.8%. In addition, consumer companies are achieving record sales as millions of people leave impoverished villages and join the urban middle class. In 2011, Sub-Saharan Africa grew 4.9%, and the World Banks says that the region should grow 5.3% this year.

Funds with sizable stakes in the fastest-growing countries include Harding Loevner Frontier Emerging Markets ( HLMOX), T. Rowe Price Africa & Middle East ( TRAMX), and Guggenheim Frontier Markets ( FRN). All the funds are young and volatile, so they are only appropriate for aggressive investors. But it is well worth monitoring the portfolios because markets in Africa and the Middle East could grow steadily for years to come.

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The recent strong showing of African stocks represents a big change from last year. Markets throughout the region plummeted early in 2011 as investors feared that the protests of the Arab Spring would spread and disrupt businesses. Stocks suffered again when the European crisis intensified in the summer, and investors lost their appetite for risky shares in the emerging markets. Lately the fears have dissipated as investors worry less about instability in Europe and the Middle East.

Pradipta Chakrabortty, portfolio manager of Harding Loevner Frontier Emerging Markets, says that the outlook is particularly promising for Gulf oil producers. Seeking to prevent social unrest from spreading, governments have embarked on massive spending programs in countries such as Qatar and Saudi Arabia. The regimes are investing hundreds of billions of dollars on new airports, roads and educational institutions. Governments have raised salaries and increased social welfare programs.

"People have more disposable income, and they are spending on consumer products," says Chakrabortty.

One of his favorite holdings is Jarir Marketing, a Saudi retailer that sells books and electronic products. In a country with limited entertainment options, families swarm to massive Jarir stores that feature hot-selling cellphones and tablet computers.

He also likes Qatar Electricity and Water, a utility. Power sales should increase as the country spends heavily on increasing it grid. The company has exclusive rights to operate desalinization plants, an important business in a desert region.

Larry Seruma, portfolio manager of Nile Pan Africa, favors Nigeria, an oil economy that reported GDP growth of 7.7% last year. Seruma says Nigerian banks represent special bargains. In recent years, the leading banks have been increasing earnings at annual rates of more than 30%. The growth is likely to continue because Nigerians are just beginning to obtain mortgages and use other banking services.

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With a market capitalization of $2.7 billion, Zenith Bank is one of the country's biggest. The bank has a rock-solid balance sheet, yet it pays a dividend yield of 9.4%, more than double the payout for comparable institutions in South Africa and other more established emerging markets. The Nigerian bank must pay a steep yield because global investors have not yet discovered the opportunities that the country presents, says Seruma.

He also likes producers of oil and gas. A holding is Cove Energy, which has fields near the East African coast in Tanzania and Mozambique. The resources are particularly valuable because they are convenient for the fast-growing markets in China and India. "There is a bidding war for reserves that can serve Asia," says Seruma.

Seruma has 38% of his assets in South Africa. He says that many businesses in the country stand to benefit from growth in neighboring countries. South African retailers and banks are opening new outlets in Nigeria. Consumer products companies are exporting throughout Sub-Saharan Africa.

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"The government wants companies to emphasize trade with Africa, instead of focusing primarily on exports to Europe and other sluggish developed markets," says Seruma.
Stan Luxenberg is a freelance writer specializing in mutual funds and investing. He was executive editor of Individual Investor magazine.