Firms are rushing to secure supertankers in order to profit from growing contango spreads as crude oil prices continue to fall compared to futures prices (see Times Online article). Frontline estimates that about 80 million barrels of crude oil are currently being stored in tankers (see Bloomberg article), with 30-35 very large crude carrier storing 2 million barrels of crude each. Not surprisingly, a rush into the contango trade is causing tanker rates to increase about $75,000 a day. In some cases, shipping rates have fallen over 90 percent within the last year, with crude oil storage rates falling nearly 80 percent. Teekay (TK) is now trading about $19 a share after coming off its recent low of just below $11, Frontline (FRO) is trading near $31 a share, after coming off a low of $25 a share, and Overseas Shipping Group (OSG) is trading around $41 a share after a recently low of just over $28 a share in late November. Drybulk shippers have also seen rates rise recently, as much as 20 percent (see Yahoo!Finance article). DryShips (DRYS) fell to below $4 a share, after reaching $116.43 back in May. The company is currently trading over $15 per share. Diana Shipping (DSX) has come off its low of $6.85 to trade over $12 per share. Nonetheless, although there are some signs of improvement (see SeekingAlpha article), the contango spread and potential increased demand may not be enough to turn-around the industry, not just yet anyway. Exports from Asia have fallen off a cliff, and will no doubt continue to put pressure on cargo rates, leaving numerous companies at risk of failing. Until global demand begins to increase, or capacity begins to decrease, it may be a little longer before any rally can be trusted with confidence and expected to continue, the contango trade notwithstanding.

A few months ago BullBearTrader highlighted a U.S. News and World Report interview with Jon Auerback, in which he discussed potential new BRIC-type countries (see the original article, or initial post). In the article Auerback mentions Nigeria, Zimbabwe, and Kenya as potential regional opportunities. Other analysts and investors have also begun to talk about Africa as being one of the next regions for achieving above average growth and investment opportunities, even given some of the political, economic, and inflationary risks that still exists.

To take advantage of current and future redistribution of capital into Africa, Van Eck Global is offering a new frontier market exchange traded fund called the Market Vectors Africa Index ETF (AFK). For more information, see the IndexUniverse article, or read the prospectus. The AFK is not the first vehicle to begin tracking the performance of companies domiciled or operating in Africa. In a recent post we discussed the newly offered PowerShares MENA Frontier Countries Portfolio (PMNA). The PMNA tracks the Nasdaq OMX Middle East North Africa Index, which includes the countries of Bahrain, Egypt, Jordan, Kuwait, Lebanon, Morocco, Nigeria, Oman, Qatar, and the United Arab Emirates.

The AFK is unique in that it follows the Dow Jones Africa Titans 50 Index, covering 50 stocks from 11 different African markets, including Nigeria (32.5% weight total, 25.2% onshore, 7.3% offshore), South Africa (26.2% total, 24.7% onshore, 1.5% offshore), Egypt (13.1%), Morocco (11.4%), Equatorial Guinea (6.2% offshore), Zambia (3.4% offshore), Angola (2% offshore), Mali (1.7% offshore), DR Congo (1.5% offshore), Kenya (1.2%), and Ghana (0.7% offshore).

A few points are worth noting about the index. For one, not all of the companies in the index are domiciled in Africa but are nonetheless included since they derive a majority of their revenues from African markets - thus the classification of "offshore." Also, the index is not constructed totally of frontier markets. Both South Africa and Egypt are typically classified as emerging (see previous post for a discussion of the distinction between emerging and frontier markets). This classification is important given that the emerging markets represent nearly 40% of the index. This actually gives the index both the higher growth and return potential of the higher-risk frontier markets, but also some of the liquidity of slightly less risky investable emerging markets.

The index is market cap weighted and sets maximum holdings at 25% for countries and 8% for any individual companies. Of interest is that Nigeria is already overweight at 32.5% total weight, with 25.2% onshore. It is not clear if the offshore percentages are included in the 25% country limits. Banks currently make up 33.7% of the index, with basic resources at 18.2%, oil and natural gas at 13.5%, telecommunications at 10.2%, and technology at 7.3%. As for components, the fund states that it "..will normally invest at least 80% of its total assets in securities that comprise the Africa Titans 50 Index." Companies must have market capitalizations greater than $200 million. The fund's prospectus also mentions that it may utilize derivatives. The expense ratio for the fund is 1.2%, which can be waived down to a net expense ratio of 0.83%, but is still expensive compared to some of its peers.

While not a pure frontier market ETF (there currently are none), the index does give concentrated exposure to the African region, allowing investors to follow their belief that growth in Africa may be the next big thing. Given capital flows into Africa, and the benefits of higher commodity prices for some of natural resource rich countries in the region, a small exposure to Africa within your portfolio may be worth considering.

IndexUniverse is reporting the offering of a new frontier markets ETF on the Nasdaq: the PowerShares MENA Frontier Countries Portfolio (PMNA). The PMNA will track the Nasdaq OMX Middle East North Africa Index, which includes the countries of Bahrain, Egypt, Jordan, Kuwait, Lebanon, Morocco, Nigeria, Oman, Qatar, and the United Arab Emirates. Claymore recently offered the Claymore/BNY Mellon Frontier Markets ETF (FRN) on the Amex, which is more global given that in also includes countries in Asia, Europe, and Latin America, along with the Middle East and Africa. As a result of its focus, the PMNA is a little more concentrated in oil-rich countries. In a recent post we discussed the new Gulf States index launched by S&P, called the GCC 40, covering 40 stocks from the Gulf Cooperation Council. Of interest is that this index covers some of the same region as as the PMNA, but is focused more on financial companies, and less on crude oil and industrial companies.

The PMNA ETF may be of interest to those investors looking to participate in the growth of the oil-rich gulf states that are themselves in the process of reinvesting capital. Furthermore, some analysts have recently discussed how Africa could be one of the next regions for growth. If this is the case, then Northern Africa would be a good place to start investment in this continent.

Also, for those who are interested, there is a distinction between emerging and frontier markets. The term emerging market was first introduced by the World Bank and is often used to describe a country with an economy that is in the process of rapid industrialization, and one that usually finds itself between developing and developed status. The term frontier market is often used to describe equity markets of smaller and less accessible countries of the developing world, yet still investable. Frontier markets are essentially "pre-emerging" markets that are expected to be classified as emerging markets once capital and liquidity increase. Frontier markets could have a high level of development, but still be too small to be considered emerging (for instance, the Baltic States, such as Estonia and Lithuania). They could also be countries where investment restrictions have started to loosen, allowing companies to be investable (such as countries in the Gulf States), or be countries with lower levels of development than similar regional emerging markets (such as Vietnam and Pakistan). As to be expected, frontier markets in general may offer higher return and longer-term growth, but will also carry more risk.