Today, on June 11, the world is gathering in South Africa for the 2010 FIFA World Cup--the first time the greatest sporting tournament on Earth will be held in Africa. To prepare for the expected influx of 300,000 or more visitors during the month-long event, South Africa has spent £2.6 billion on infrastructure improvements. While the host country may not be expected to hold the FIFA World Cup Trophy aloft during the final on July 11, the real winner may be the local economy, and investors can cheer along with the ‘Bafana Bafana’ (the team’s nickname, which means ‘the boys’) by holding a South African ETF.
Hosting the tournament is expected to lift South Africa’s GDP growth by 0.3% this year (about £2.5 billion) to between 3.1% and 3.4%. Not only are economists expecting a one-time boost from £1.4 billion in tourism spending and an additional £800 million in retail spending, but South Africa can also expect a 10% increase in tourist arrivals over the next decade judging from the historical experience of previous host countries. However, the greatest legacy of the tournament will be the investments in the country’s transportation infrastructure.
With 64 games taking place in nine different venues, hosting a World Cup can be a challenging logistical nightmare. But after years of preparation, South Africa is ready. A list of the infrastructure projects undertaken with the World Cup in mind is impressive: six new stadiums built and five existing stadiums refurbished, R20 billion (£1.8 billion) for airport improvements, R96 billion (£8.5 billion) on road infrastructure improvements, R18 billion (£1.6 billion) on upgrades for the rail system, as well as 30 new hotels built in Johannesburg alone and £90 million on new taxis. These investments will pay off in increased productivity for years to come.
The South African Economy
Although it may not be the strongest competition, South Africa’s economy is the strongest of the continent. While it is still considered an emerging market and has significant economic issues, the country has numerous advantages compared to its neighbours including a relatively effective government, an abundant supply of natural resources, a modern stock exchange, and now a world-class transportation infrastructure. Still, the country’s high rates of unemployment, poverty and HIV infection prevent the economy from reaching its potential.
South Africa was first colonised as a trading post, and later migration was concentrated on agriculture, but the country’s economy is now dominated by its large mineral wealth. Many of South Africa’s largest companies are mining firms, and the industry represents 18% of the country’s GDP. The country is the world’s largest producer of gold, platinum, chromium and manganese, and is second in production of palladium. These products have a global market, so any broad-based investment in South Africa will be correlated with global GDP growth.
Choosing an Index
There are two South African equity indices available in ETF format: the MSCI South Africa index and the FTSE/JSE Top 40 index. Both indices are free-float market cap adjusted, and have provisions for minimum liquidity levels for the underlying components. While the two indices have similar holdings, there is one significant difference; the FTSE/JSE Top 40 includes three global companies that the MSCI index excludes. These three companies, BHP Billiton, Anglo American and SABMiller, account for more than a third of the index.
The large concentration of the first two of those companies makes the FTSE/JSE index much more heavily weighted towards the basic materials sector; 42% of the index is made up of this sector, compared to the MSCI index which has a 27% weighting towards the sector. The next largest sector concentration for both indices is with financials, with a 22% and 27% weighting, respectively.
While we have more visibility into an estimate of the fair value of the underlying stocks based on Morningstar equity research with the FTSE/JSE index, both indices appear to be trading close to their fair value.
Choosing an ETF
Because of the few options available, the choice of which index you prefer may well dictate which ETF you invest in, or vice versa. For the index agnostic, the annual fees for these ETFs are similar, so other factors such as whether or not dividends are distributed to shareholders or the ETFs' method of replication--swap-based or physical--may be the determining factor for your investment. For investors limited to ETFs trading on the London Stock Exchange, the choices are limited to the iShares ETF and the Lyxor GBP ETF.
The Outlook for South Africa’s Economy
In 2006, Germany hosted the World Cup and experienced a large jump in retail spending and services, but the end of the tournament brought a sharp slowdown in economic activity back to normal levels. While economists expect a similar short-term boost in South Africa, the long-run potential gain may be greater from the infrastructure investments.
Still, no matter the success of the tournament in changing the world’s perception of South Africa, the country will still face a wealth of challenges, including an unemployment rate of 25%, poverty levels approaching 50% and frightening violent crime statistics.
Interestingly, a platinum ETF may be an even more direct play on the success of the World Cup than a South African ETF. South Africa produces approximately three-quarters of the global annual supply of platinum, which takes up a lot of the country’s energy resources. The state-owned energy company Eskom has promised uninterrupted power supply for the World Cup, so any shortfalls in supply will be felt by the mining industry. In 2008, Eskom was forced to cut energy capacity to miners and within a few weeks the price of platinum increased approximately 40% due to supply shortfalls. A similar scenario could occur this summer, though this would be quite a risky speculation.
