Africa: Sleeper Investment of the Century

No Direction Home
The Inflation/Deflation Balance Is Precarious
Top Investments For Core Portfolios
Africa: Sleeper Investment Of The Century
The Bottom Line This Week

Since our last issue, the stock market roller coaster made several more trips around the track. At this writing, prices are nearly back where they started with the Dow up marginally 0.3% and the Nasdaq off 0.7%. Although the market appears to be taking a breather at present, we think investors should expect a volatile summer.

No Direction Home

The stock market's gyrations reflect similar moves in most economic indicators. Not only are the key signals mixed, they often change direction from one week to the next.

It doesn't help that every few days or so another black swan shows up to make investors nervous. The most recent unwelcome incidents include the disastrous BP oil gusher in the Gulf of Mexico, the high profile raid on the Gaza "peace" flotilla, the torpedoed South Korean patrol ship, and the plunging euro. There is a growing feeling among millions of people that political and economic stability in many parts of the world are hanging by a thread.

At the same time, however, many multinational companies are reporting very good earnings. In addition, consumers are still paying visits to the mall although they are being more careful with their money. The summer vacation season is also off to a good start. In short, much of the evening news is grim but the day to day reality for most Americans is pretty good.

The Inflation/Deflation Balance Is Precarious

One black swan that we hope never to see is an end to the balance that currently exists between the forces of inflation and deflation.

As we have been advising for quite some time, the way the government has been spending money in recent years suggests that the U.S. is probably heading for another period of rising inflation.

At the same time, however, home foreclosures, business failures, layoffs, wage reductions and the like are reducing the money supply about as fast as Washington can create it. If the outflow increases very much, deflation will win the monetary contest. 

It is important to watch the inflation/deflation tug-of-war carefully because the strategies for dealing with the two conditions are very different. Inflation favors precious metals and other tangible investments that usually keep pace with rising prices. On the other hand, cash is king during deflation because its buying power will rise.

Your best course of action now is to remain diversified so you won't be caught short if the inflation/balance moves against your expectation. We think it is a good idea to have some gold and silver, but also keep a larger amount of cash than might otherwise be the case. 

Top Investments For Core Portfolios

In addition to investments that take advantage of today's conditions, every portfolio should have some core positions that are held for an extended period. Two assets serving that function very well are rental housing and multinational blue chip stocks.

Of course, no investment is immune to downturns. As we have recently seen more clearly than we would like, when tough recessions occur the price of anything can plunge.

When the downturns end, however, rental housing and multinational blue chip stocks have always recovered, and have gone on to make new highs. That's why we are comfortable recommending both investments when their near-term outlooks appear poor. In fact, that's the best time to buy them.

Multinational blue chip stocks have an excellent track record for delivering long-term gains. Their value was well understood by legendary investor Sir John Templeton who said about them:

Not yet have I found any better method to prosper during the future financial chaos which is likely to last many years than to keep your net worth in shares of those corporations that have proven to have the widest profit margins . . . especially if diversified among many nations.

The blue chips are already well along the recovery path. Since March 9, 2009, the Dow rose 72.7%. However, the index recently dropped back 9%. We think savvy investors should use the discount as a buying opportunity.

We are ahead of the game with the leading multinational blue chip stocks, many of which have been recommended in this newsletter. Looking particularly good right now are:

Exxon Mobil (XOM) http://finance.yahoo.com/q/bc?s=XOM&t=1y,

EnCana (ECA), http://finance.yahoo.com/q/pr?s=ECA,

Colgate Palmolive (CL) http://finance.yahoo.com/q/pr?s=CL,

Coca Cola (KO), http://finance.yahoo.com/q/pr?s=KO,

Eli Lilly (LLY) http://finance.yahoo.com/q/pr?s=LLY,

Johnson & Johnson (JNJ) http://finance.yahoo.com/q/pr?s=JNJ,

Merck & Company (MRK) http://finance.yahoo.com/q/pr?s=MRK,

Procter & Gamble (PG) http://finance.yahoo.com/q/pr?s=PG, and

General Electric (GE) http://finance.yahoo.com/q?s=ge .

With economic growth on the rise in many countries, aggressive investors should also do very well with:

Bank of America (BAC) http://finance.yahoo.com/q/pr?s=BAC,

Wells Fargo (WFC) http://finance.yahoo.com/q/pr?s=WFC,

JP Morgan Chase (JPM) http://finance.yahoo.com/q/pr?s=JPM, and

Goldman Sachs (GS) http://finance.yahoo.com/q/pr?s=GS.

Although the financial service industry is in the dog house right now, it is still a key beneficiary of global growth – and it will remain so. We don't need to like them to profit from them. As the Swiss like to say, "Money has no smell."

Rental housing is coming back more slowly that blue chip stocks, but we have no doubt that it will also make a full recovery - as it has always done in the past.

This should be a good time to buy rental housing as prices are attractive in most areas, and so are mortgage rates. As a result, rental housing will often "pencil out." That means the rents they generate will cover the mortgage payments, taxes and maintenance costs – plus provide a positive cash flow to the owner.

One major benefit of rental housing and multinational blue chip stocks is they produce income during all but the most dire of economic conditions.

Africa: Sleeper Investment Of The Century

Africa is emerging as the world's leading long-term investment. It's a classic early bird opportunity because the region is almost completely overlooked on Wall Street.

China is becoming a major engine for Africa's growth. The country is turning eastern Africa into its private energy and raw materials jackpot. Currently, the country is getting 30% of its oil from Africa. China is also building the infrastructure to get the wealth out.

What we see in the Congo is typical of what China is doing in many parts of Africa. China recently unveiled a package of infrastructure investments that will total $6 billion. That's roughly half of Congo's GDP. China will build huge new cobalt and copper mines, 1,800 miles of railroads, 2,000 miles of roads, hundreds of schools and clinics, and two new universities. The president of the Congo, Pierre Lumbi, called the program "Africa's Marshall Plan."

In April China announced that it is planning another big move in Africa, and few people in this part of the world took any notice. China plans to use its vast foreign reserves, plus funds from the World Bank, to develop a manufacturing base in Africa. It is a natural second step for China because many of the necessary raw materials are already there.

Africa has another great resource to offer the world. The continent has some of the richest farmland on the planet, most of which is unused. As a result, several countries are buying huge tracks of fertile land in Africa and are setting up mega-farms. China, South Korea, Japan, and Saudi Arabia are already well established in African agriculture.

If you have not done so already, we think you should take a long term position in the development of Africa. The payoff won't come quickly and progress will be by fits and starts. But exceptional long term gains are on the way.

The smartest way to invest in Africa is with a good mutual fund or an ETF. For the latter we think the Market Vectors Africa Index ETF (AFK) offers the most promise http://finance.yahoo.com/q/pr?s=AFK. No other fund is as broadly invested in the continent. The ETF follows 51 different African companies that are spread fairly evenly throughout the region.

If you would prefer an actively managed fund instead of an ETF that tracks an index, we recommend the T. Rowe Price Africa & Middle East Fund (TRAMX) http://finance.yahoo.com/q/pr?s=TRAMX. In addition to its African investments, the fund holds several Middle Eastern stocks. However, they are primarily from stable and prosperous areas. 

The Bottom Line

The stock market is continuing to swing in both directions as nervous investors take their cues from changing economic indicators, and some scary world events. As a result, many multinational blue chip stocks have once again become attractive. In most parts of the country, the same can be said for top residential rental real estate.

Longer term, we think there is no better opportunity on the planet than Africa. If you missed the German, Japanese, and Chinese economic miracles there is no need to feel left out. You are right on time for Africa that will ultimately dwarf them all.

Until Next Time

The AIA "Advocate For Absolute Returns", a publication of The Association for Investor Awareness, Inc., tracks market trends, industry news, the SEC, global trade and finance and Washington developments for you because they affect your investments. But who doesn't? Many sources report these issues as abstract facts. We feel that's not enough. The AIA Advocate's job is to warn you of what's important and how these developments translate to ground-level forces and threats that directly affect your wealth as well as your current investment opportunities. Not just information, but information you can use. Until next time...


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Posted 06-24-2010 10:43 AM by Research & Editorial Staff