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Another BRIC in the Wall: Welcome, South Africa

Fin - Breakout - US
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When the leaders of the world's largest emerging markets convene in China today, a new player will join the stage at the third annual BRIC Summit: South Africa.

BRIC refers to Brazil, Russia, India and China, and was created by Goldman Sachs economist Jim O'Neill in 2001 to illustrate how power was shifting from developed, G7 countries to these four emerging economies. South Africa shares little in common with its BRIC counterparts. China's population of 1.36 billion eclipses South Africa's 49 million as do the populations of India (1.2 billion) and Brazil (191 million). South Africa's $286 billion economy, the largest in Africa and ranked 31st in the world, amounts to less than a quarter of the size of Russia's economy, previously the smallest BRIC nation.

So why was South Africa chosen to become the newest BRIC? Patty Oey, an ETF analyst at Chicago-based Morningstar, told Breakout that inviting South Africa as a member broadens BRIC's geographic diversification and gives BRIC the "clout" it needs to achieve greater recognition in the global economy. South Africa's membership also draws international attention to Africa and establishes Africa as the newest source of growth and prosperity.

There are several opportunities for investors to ride the South Africa wave, Oey says. The iShares MSCI South Africa (EZA) tracks 85 percent of South Africa's largest companies and gives shareholders a 25 percent exposure to mining and material stocks — a risky proposition, Oey says. Gold miners and industrial metal miners do well when the price of gold goes higher, but commodity selloffs can leave investors too exposed to the volatile movement in gold, she says.

Another choice for investors interested in South Africa is to buy shares of the Rand, South Africa's currency, with WisdomTree Dreyfus South African Rand Index Fund (SZR). Oey prefers EZA to SZR because EZA is a broader market fund that also offers exposure to the Rand. Both indexes are trading lower this year after posting double-digit gains in 2010 (EZA: 36.9% in 2010; SZR: 19.5% in 2010).

Overall, Oey says BRICS offers more opportunities for investors compared to the developed economies, despite inflation concerns in China and Brazil. These two countries in particular have been aggressive in fighting inflation, commencing monetary tightening policies since last year. China and Brazil appear to have stemmed their inflation troubles, says Oey, and their central banks could soon ease fiscal tightening, boosting domestic companies and stock prices.

One BRICS member to remain wary of is Russia, says Oey. Rising oil prices have boosted the economy and oil-producing companies in Russia, but positive news could quickly turn negative if investors send the price of oil lower. Oey also points out that Russia's corruption and weak property laws could deter investors.

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