Africa ETFs: Infrastructure to power economic growth in South Africa

Apr 5th, 2012 | By | Category: Equities

South Africa is likely to show stable economic growth in the next five years with annual GDP growth expected to average between 2% and 4%.

Africa ETFs - Infrastructure to power economic growth in South Africa

Average annual GDP growth in South Africa is expected to be between 2% and 4% over the next five years (Cape Town pictured).

Relatively strong consumer spending power, a large market and a stable, diverse economy makes South Africa an attractive market in an African context, according to Frost & Sullivan, an international consulting and research firm.

Considering macroeconomic conditions, inflation is set to decline slightly until 2017, with interest rates rising by 2% during the period. Inflationary pressure is expected to be predominantly supply-driven, in the first half of the forecast period, with consumption expenditure increasing in 2014 with slight demand-pull inflation.

In the past decade, from 2000 to 2009, GDP was driven by consumption expenditure, which increased in conjunction with household debt. Credit extension was limited in 2007 by the National Credit Act, which promoted responsible lending by financial institutions. This led to a marked decline in credit being extended to the private sector in 2007, and this spared many consumers during the financial crisis of 2009.

FEATURED PRODUCT

HSBC MSCI South Africa ETF (HZAD)

– Tracks the MSCI South Africa Index, a market-cap
weighted index measuring the performance of the
largest companies in South Africa

– Physical replication with full transparency to
underlying holdings

– UCITS IV compliant, London listed, UK Reporting
Status, eligible for ISAs and SIPPs

– TER 0.60%, fair for an emerging markets fund
and considerably less than actively managed
mutual funds offering comparable exposure

South Africa has many exciting growth prospects for the future. In the past, fixed capital formation has been relatively low, but has increased dramatically, since 2008, and is set to continue into the future. There are various medium and long-term infrastructure projects that are in place for the South African economy that will drive job creation and will stimulate economic growth.

The major areas identified for infrastructure development are for the energy, transport, water and sanitation sectors, notes Frost & Sullivan. The budget allocations made in 2012 will serve to drive these developments that are expected to attract significant private investment and public private partnerships.

Various other key sectors have been identified as ‘job drivers’ under the New Growth Path, set in motion in 2011. This plan seeks to maximise job creation in the economy, by promoting and supporting industries and sectors that can drive job creation. These sectors include agriculture and agri-processing, mining and beneficiation, manufacturing, the ‘green economy’ and tourism.

The green economy will focus on renewable energy generation. The Integrated Resource Plan, which is a 20 year plan for upgrading electricity generation in South Africa, has set a goal of 42% of electricity generation from renewable resources by 2030. Major contributors to these initiatives will be solar and wind farms.

South Africa will need these infrastructure investments to remain an economy and infrastructure powerhouse in the Sub-Saharan region. It is currently seen as a safe investment platform for expansion into the rest of Africa, and these developments should enforce its status. The safety of investment into South Africa is supported by the fact that it was ranked number one for auditing and reporting standards by the World Competitiveness Report. It also ranked in the top three for regulation of securities exchanges, soundness of banks and availability of financial services.

Future growth seems to be on a more sustainable path, concludes Frost & Sullivan, with investment driving growth, job creation and skills development in a country where economic growth and social welfare are key priorities.

For investors looking to access South African equities, there are a number of ETFs to consider.

South Africa

HSBC MSCI South Africa ETF (HZAD) TER 0.60%

Lyxor South Africa (FTSE/JSE Africa Top 40) ETF (LSAF) TER 0.65%

Credit Suisse MSCI South Africa ETF (CZA1) TER 0.65%

iShares MSCI South Africa ETF (SRSA) TER 0.74%

The above HSBC, Lyxor, Credit Suisse and iShares funds are listed on the London Stock Exchange.

RBS Market Access FTSE/JSE Africa Top 40 Index ETF (M9SK GY) TER 0.65%

Nedbank BettaBeta Equally Weighted Top 40 ETF (JSE: BBET40) TER 0.39%
Equal-weighted version of the FTSE/JSE Africa Top 40 Index

Investors may wish to expand their horizon beyond South Africa and gain exposure to some of the faster-growing (but higher risk) frontier markets Africa has to offer.

Africa

DB X-tracker MSCI Emerging and Frontier Markets Africa Top 50 Index ETF (XMAF) TER 0.65%
London-listed. Provides exposure to South Africa, Egypt, Nigeria and Morocco.

RBS MSCI Emerging and Frontier Markets Africa ex South Africa ETF (M9SZ GY) TER 0.85%
Provides exposure to Egypt, Nigeria, Morocco, Kenya, Tunisia and Mauritius

Van Eck Market Vectors Africa Index ETF (NYSE: AFK) TER 0.78%
Provides exposure to companies that are headquartered in Africa or that generate the majority of their revenues in Africa; includes holdings in South Africa, Nigeria, Morocco, Egypt and Kenya.

Standard Bank Africa Equity Index ETN (JSE: SBAEI)
Provides exposure to a diversified basket of shares across 28 African counties.

Europe, Middle East and Africa (EMEA) Emerging Markets

Credit Suisse MSCI Emerging Markets EMEA ETF (CME1) TER 0.65%
London-listed. Provides exposure to African emerging markets including Egypt, Morocco and South Africa, as well as other emerging markets across Europe and the Middle East.

Source FTSE Emerging EMEA 40 ETF (EM40) TER 1.2%
London-listed. Provides exposure to South Africa (largest country weight), as well as other emerging-market countries across Europe and the Middle East.

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