A number of investors expressed surprise—if not open astonishment—when Brazil, Russia, India and China (BRIC) formally invited South Africa to join their emerging markets group at the end of 2010. After all, the country’s tepid rate of GDP growth trails the annual double-digit GDP acceleration of China and India, and even the more modest rates of non-BRIC countries like South Korea and Mexico.

But South Africa presented an attractive investment opportunity when looked at from a number of angles. Chief among them: “South Africa’s economy appears generally more stable” than that of most global emerging markets (GEMs), says David Hauner, London-based head of BofA Merrill Lynch Global Research’s Economics and Fixed Income Strategy Group for Emerging Europe, Middle East and Africa (EEMEA).

That stability is the result of South Africa’s inward-looking nature: Two-thirds of its production growth is aimed at meeting domestic consumer demand.¹ That pattern of growth is the reverse of the trend in many other developing nations, including the BRIC countries.² “Economies that depend on exports and outside investments can be more volatile, especially when their trading partners suffer their own economic downturns,” Hauner says.

South Africa’s dual nature

By some measures, South Africa has more in common with developed countries than with emerging markets. Its financial infrastructure includes a strong central bank; commercial banks increasingly willing to make loans; courts able to deal with economic disputes; a sophisticated pension fund industry that encourages investments; and transparent, stable and, for a GEM, very liquid equity and fixed income markets.

On the other hand, Hauner says, South Africa’s extreme poverty positions it squarely among the least developed frontier markets. Although its 2011 per capita GDP of $11,000 puts it on par with Brazil’s $11,600,³ its wealth is unevenly distributed, with much of the population living in desperate straits. Unemployment remains above 25%, and is even higher among black South Africans. All this is cause for concern, obviously, since unhealthy wealth distribution often leads to serious political turmoil. But this may also mean that there is real room for expansion as the country attempts to bring employment and stability to more of its citizens.

Looking to the future

Indeed, Hauner expects much of the future growth to come from within South Africa as it moves toward enriching its people. The government recently launched the New Growth Path, a program that aims to create 5 million jobs over the coming decade, primarily in infrastructure, agriculture, mining, manufacturing, tourism and the green economy. In addition, it has pledged reforms to make it easier for the private sector to do business and has budgeted 8% of annual GDP to create jobs through targeted programs and subsidies.⁴

At present, bank interest rates to South African consumers seem to be falling, in keeping with interest rate trends around the world. Affordable loans, combined with higher employment, could spur consumer spending in the country, particularly on housing and related consumption. Hauner forecasts South African GDP growth of 2.8% in 2012, rising to 4.0% in 2013. “That’s clearly not as impressive as China, for example,” he says, “but it is steady growth that investors can tap through the equity markets.”

Additionally, most of the country’s exports are commodities, which are in great demand, especially from other emerging nations that are experiencing rapid infrastructure growth. To meet the demand, South African mining companies are broadening investments in their African neighbors. Greater access to these countries means potential to extract more platinum, diamonds, manganese, gold and chrome.

The strength of the South African consumer

One segment of South Africa’s economy is clearly on the upswing, Hauner says. Although South Africa’s population is less than 50 million, smaller than that of the traditional BRIC nations, Hauner expects the consumer goods sector to grow about twice as fast as overall GDP, at an annual rate of 9.9% by 2013. Household consumption, he says, should grow by 3.8% in 2012 and 4.3% next year.

Investing in South Africa is relatively straightforward. “Individual stocks, traded as American depositary receipts (ADRs) and on the Johannesburg Exchange, are very liquid because the stock market has such well-established trading mechanisms,” Hauner says. Commodity-sector exchange-traded funds and mutual funds tend to have solid South African representation, and several country funds exist as well. What’s more, several BRIC funds may revise their offerings to include South Africa. Many U.S. multinationals, including giants in the automotive and energy industries, also have substantial operations in the country and may provide exposure to South African growth.

South Africa’s dual nature may indeed prove to be what makes it attractive to some investors, particularly those concerned that other emerging markets may not have stable, mature financial infrastructures. “South Africa enjoys many of the advantages of a steady, developed environment,” Hauner says. “But unlike developed countries, it has more interesting growth potential.”