Why Africa could be a safe haven from America’s woes

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Visiting the offices of gemstone miner Tanzanite One (TNZ), in northern Tanzania, gives you a whole different view of Africa from the grimmer images normally associated with the continent.

In ones and twos, the Massai arrive at the company’s Arusha office on flash new mopeds, their tartan ponchos slung over their shoulders. They have the latest cell phones glued to their ears. One for business, another for the wife, and as Tanzanite One’s then chief executive Ian Harbottle, explained to me when I visited the site last year, “another for the mistress.”

Inside though, the 50 or so locals had other things on their mind, as they awaited their turn to show off the blue tanzanite gems they’d found on their own digs. When ready, they’d watch the jeweller meticulously cast his loupe over their tanzanite, before weighing them for quality. After a wait of an hour or so, they could walk out with as much as $2,000-$3,000. Not bad for two or three weeks’ work.

Tanzanite has been good to Arusha. And Arusha, nestled under the icy glaze of Mount Kilimanjaro, has returned the favour for Tanzanite One, which earlier this month, reported a doubling in profits for 2007.

But it’s not just gemstone production that’s booming in Africa…

Business is booming in Africa. And it’s not just benefiting the high and mighty. Having expanded by 6% a year since 2004, sub-Saharan Africa is expect to grow 7% this year, on the back of booming demand for commodities. Oil, gas, gold and copper are all found in vast quantities on the continent, as well as some as some of the odder gemstones you might not have heard of.

Why you should get into gemstones

Tanzanite One has proved itself adept at mining one of them. The world’s largest producer of the blue-hued gemstone, it saw full year profits more than double in 2007. Net income rose 267% to $6.6m, or 8.58 cents a share, from $1.8m, or 2.3 cents a year earlier, on the back of a 38% rise in production.

Demand for the rare blue gem has also increased, partly down to Tanzanite One’s canny positioning of the gem as a ‘birthstone’. A man is meant to give it to his wife on the birth of their first baby, a marketing tool which echoes De Beers’ successful campaign to associate diamonds with getting engaged.

Prices for gemstones are doing well, says Scott Finlay, an analyst with London-based Canaccord Adams “and historically, have appreciated when the US dollar has weakened. So getting into gemstone producers right now is a good strategy,” he says citing Tanzanite One and Gemfields, an emerald miner, as two examples.

We certainly like Tanzanite One, and have done for a while. But bounty lies elsewhere in Africa too, and the City here in London is wide awake to the possibilities it’s thrown up. Last year saw the launch by Fidelity of the Emerging Europe, Middle East and Africa fund, which invests in South Africa, Morocco and Egypt, followed not long after by the New Star Heart of Africa Fund. Cru Investent Management recently launched their own Africa fund. And the timing is no coincidence.

Frontier markets could prove resilient

Frontier markets, the sorts of economies that hitherto would have scared off all but the boldest or most reckless investors, could prove to be quite resilient to a US recession. That’s down to the low correlation they have historically shown with developed markets.

Over the past seven years, frontier markets such as Kenya’s and Tanzania’s have had a low correlation with that of the MSCI World index, which represents equities in developed economies. It stood at 0.4, against 0.8 for emerging markets (a correlation of one would mean the two markets move in lockstep).

So as the Dow Jones and US dollar continue to tick down, it might not be a bad idea to start buying some tanzanite, or Tanzanite One at least. And Africa, for that matter.

Do bear in mind however, that frontier markets aren’t called frontier for nothing – only invest money that you can afford to lose, or at least see subjected to fairly volatile movements. If you’re looking for a fund, all require sizeable initial investments, but New Star’s Heart of Africa fund, can be bought through a fund supermarket such as Hargreaves Lansdown, which enables you to invest less than the minimum investment of £12,500 which applies if you go direct to the fund manager.

Turning to the wider markets…

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Economic worries return to Wall Street

In London, the FTSE 100 added 57 points to end the day at 5,717, just below an intraday high of 5,735. Persimmon was by far the day’s biggest gainer, adding over 7% as the housebuilding sector rallied.

Across the Atlantic, the Paris CAC-40 added 42 points to end the day at 4,719. And in Frankfurt, the DAX-30 closed 88 points higher, at 6,578.

On Wall Street, stocks fell for a second consecutive day as the technology sector weighed following disappointing results from Oracle and Google. The Dow Jones fell 120 points to end the day at 12,302. The broader S&P 500 was down 15 points, at 1,325. And the tech-heavy Nasdaq slumped 43 points to close at 2,280.

In Asia, stocks rose today led by property and commodity plays. The Japanese Nikkei was 215 points higher, at 12,820. And in Hong Kong, the Hang Seng was 621 points higher, at 23,285.

Pound tumbles on bearish housing data

Crude oil had fallen back to $106.60 this morning and Brent spot was down by over a dollar, at $104.28.

Spot gold tracked oil lower this morning, falling to $942.60 from $951.80 in New York late last night. Platinum, meanwhile, jumped to $2,030 on speculative buying. And silver had fallen to $18.25.

Turning to forex, the pound was broadly lower this morning as weak consumer and housing data (see below) pointed to an economic slowdown. Sterling fell to 1.9953 against the dollar and hit an all-time low against the euro before edging up to 1.2663. The dollar was last trading at 0.6345 against the euro and 100.26 against the Japanese yen.

And in London this morning, Nationwide announced that UK house prices suffered their fifth month-on-month fall in a row in February, and their slowest year-on-year growth in over a decade. The price of the average home had risen 1.1% to £179,110 from February 2007. Nationwide chief economist Fionnuala Earley pointed to a ‘clear change in sentiment’ as to expectations of future price increases.

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