Monday, May 05, 2008

A Fund Investing Solely in African Markets?

I’ve been preoccupied with risk these days. Or risk mitigation to be exact. I’m tired of watching my TD Ameritrade account get whipsawed. It’s got me thinking. Would a portfolio invested solely in African markets be a tragedy waiting to happen?

The chart below shows the correlations (or lack thereof) between the dollar-adjusted monthly returns of 10 African local stock indexes over the past 16 months. This is a relatively short time frame, but I think it’s sufficient to get an idea of some of the relationships between the countries that we cover in this newsletter.

Unsurprisingly, the strongest positive correlation we see is between the Johannesburg Stock Exchange (SA) and the Emerging Market Index (EEM). South Africa is a full-fledged emerging market. It is large and liquid, making it a favorite of funds desirous of exposure to the continent. But this also means it is likely to be hit first and worst in the event of a global economic downturn.

The next strongest correlation is that between South Africa and Namibia. The neighboring countries share a customs union, a currency linkage, and a lot of history. Thus their stock indexes move in a concerted fashion. Similarly, the markets of Kenya and Uganda exhibit a strong relationship. Investors from both countries can easily invest in one another’s markets. And landlocked Uganda is almost entirely dependent on trade routes through Kenya. Thus, Kenya’s political crisis early this year hurt the Ugandan index more than the Nairobi Stock Exchange itself!

Continue Reading at Cheetah Index

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