By Sara Nunnally, Editor, Smart Investing Daily, taipanpublishinggroup.com
Last week, I received a question from Smart Investing Daily reader C.L.V. about my article from March 3, 2011, titled, “Emerging Markets Lose Investors.”
But before we get to this question, I’d like to take a moment to send thoughts and prayers to all those in Japan affected by the devastating earthquake that has taken more than 10,000 lives and has put many more in danger.
The 8.9 magnitude quake has also severely crippled the country’s infrastructure and that will have major ramifications on power and energy supplies, world trade, and even markets. A quick $85.5 billion injection from Japan’s central bank is up against rolling blackouts and stalled production from big companies like Toyota Motors (TM:NYSE).
We’ll be following this story here at Smart Investing Daily…
But let’s get back to C.L.V.’s question:
Does anybody out there believe South Africa deserves a place among BRIC countries? If not, why? This is an issue of education and being objective.
BRIC, of course, is an acronym for Brazil, Russia, India and China. When global emerging markets were booming like mad before the global meltdown, these four countries were the stars of the developing world.
Some funds bundled these four countries together in exchange-traded funds, and they’ve been known as BRIC countries ever since.
Should South Africa be included in this mix?
A couple years ago, I was lucky enough to travel to South Africa. This was in April 2009, and the world was still in upheaval. But South Africa was one of the only G-20 nations to not have slipped into recession at the time.
It was also on the eve of the World Cup that brought hundreds of thousands of tourists to the country, and built new stadiums and trains, expanded roads and airports…
The nation was very hopeful that one of the biggest sports events in the world would uplift many underprivileged and provide long-lasting jobs. But the country’s GDP slipped nearly 2% that year, and the major problems that have plagued South Africa since the apartheid era have not gone away.
South Africa has outdated infrastructure that resulted in wide-ranging and economically destructive blackouts in 2007. That infrastructure is still not fixed.
The country has rampant unemployment. The official rate is 23.3%, but the unofficial rate is probably double that. The construction jobs from the World Cup build were only temporary… Half the population lives below the poverty line.
These are major economic and social problems. The growth from 2004-2007 did not solve these issues. In fact, the divide between the haves and the have-nots is a huge gulf. Unlike Brazil, India and China, which have growing middle classes with disposable income, South Africa has a two-tiered economy with few opportunities for the bottom tier to grow.
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Taken all together, these factors don’t lend themselves to a country that can grow dynamically. Additionally, South Africa’s population is much, much lower than any of the BRIC countries. This difference might also contribute to how quickly or slowly South Africa can grow.
For sure, the BRIC nations have their problems. Inflation for Brazil was at 4.9% in 2010. China’s was 5%, Russia’s was 6.7%, and India’s 11.7%.
But let’s compare the weighty economic figures to see how South Africa stands up to the BRIC countries.
| | South Africa | Brazil | Russia | India | China |
| GDP Growth Rate | 3% | 7.5% | 3.8% | 8.3% | 10.3% |
| Population | 49 M | 203.4 M | 138.7 M | 1.19 B | 1.37 B |
| Unemployment Rate | 23.3% | 7% | 7.6% | 10.8% | 4.3%* |
| Population in Poverty | 50% | 26% | 13.1% | 25% | 2.8%* |
| Industrial Growth Rate | 3% | 11.5% | 8.3% | 9.7% | 11% |
| *These official rates are only for urban areas. Rural areas of China experience much higher rates of unemployment and poverty, though some statistics show that including rural unemployment would “only” boost total unemployment to 9%. |
From this chart, South Africa doesn’t even compare to Russia, which some might not consider an emerging market anymore.
That’s not to say South African stocks don’t perform better than some BRIC nations’ stocks. On a one-, two-, and five-year scale, the iShares MSCI South Africa ETF (EZA:NYSE) comes in near the top of the pack, beating the PowerShares India Fund (PIN:NYSE), iShares MSCI Brazil ETF (EWZ:NYSE) and iShares FTSE China 25 Index ETF (FXI:NYSE) two out of three times.
View Larger Chart
Why this is the case is a little hard to say… It could be that because South Africa is not as well-known as the BRIC countries as a global emerging economy that its market fluctuations aren’t as severe. It could also be that Africa as a continent is still a hot spot for direct investment — at least when it comes to resources.
South Africa is the biggest economy on the continent, and thus can sometimes act as a gateway to the whole of Africa… A place to do business.
I’m still a little wary, though. Is there potential there? Maybe, but I’m not sure if it’s enough to overcome the economic issues plaguing the country as quickly as we’ve seen the growth stories of the BRIC countries.
The EZA topped out back in mid-January at around $75 and found support around $65. It’s now right between these two points and trending higher. Upside potential might be limited to $75 or so, though, as its high prior to the global meltdown was right around this level.
It’s hard to get behind EZA at these levels. A highly speculative call option might see some gains if EZA rides momentum to $75, but I’d get any gains off the table at that point… and even that’s a really risky move.
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About the Author
Sara is Managing Editor of Smart Investing Daily. As Senior Research Director and global correspondent, Sara Nunnally’s diverse resume includes studies in art history, computer science and financial research. She has appeared on news media such as Forbes on Fox, Fox News Live, and CNBC’s Squawk Box, as well as numerous radio shows around the country. Most recently, Sara co-authored a book with Sandy Franks called, Barbarians of Wealth.
As Senior Research Director, global correspondent and managing editor of Smart Investing Daily, Sara has traveled all over the world in search of the best investment opportunities to recommend to her readers, be they in developed economies like France and Italy, in emerging markets like the Czech Republic and Poland, or in frontier terrain like Vietnam and Morocco. Her unique “holistic” approach of boots-on-the-ground research has given her an edge in today’s financial marketplace as she searches for the next investment opportunities in hot sectors like alternative energy, currency markets and commodities.
