More Problems Looming for South Africa ETFs

June 19th at 7:50am by Tom Lydon

It is not a stretch to say that beleaguered investors are at this point tired of hearing about declining precious metals prices, broad-based weakness across the emerging markets universe or both. For some emerging markets ETFs, it is the intersection of those two issues that have sparked deep declines.

The iShares MSCI South Africa Index Fund (NYSEArca: EZA) is a prime example. Although the ETF allocates just 13% of its weight to materials stocks, which ranks the sector firmly in fourth place in EZA’s lineup, investors view EZA and South Africa as a materials play. That view is warranted as South Africa is one of the world’s largest gold producers, the largest platinum producer and the second-largest palladium producer. [Into Africa With ETFs]

That gives the South African rand and EZA an intimate correlation to the price of those metals. Notably, EZA does not hedge its foreign currency exposure so even though this is an equity fund, investors are exposed to fluctuations in the rand. Lately, those fluctuations have been negative with the rand touching a four-year low against the U.S. dollar earlier this month. [South Africa ETF Drops as Rand Plunges]

With EZA down more than 17% year-to-date it would seem the darkest clouds hanging over the ETF have now passed. That may not be the case. Another reason the ETF has been struggling is South Africa’s dismal unemployment rate, which is north of 20%. That number could grow due to falling platinum prices.

If we assume a $1500-ounce price and look at the breakeven platinum price for operations, then there are around 24,000 jobs at risk next year,” said Nomura strategist Peter Attard Montalto in a research note obtained by Bloomberg. The strategist added that number could surge to 121,500 at risk jobs in 2015. 

The South African government has previously threatened to revoke mining licenses of company that mull job cuts, but as Attard Montalto points out, it is hard to envision miners, platinum or otherwise, losing money for multiple years just to keep jobs alive.

Platinum prices have not been cooperative in recent months as the ETFS Physical Platinum Shares (NYSEArca: PPLT) is down almost 9%. Making matters, gold has plunged and the ETFS Physical Palladium Shares (NYSEArca: PALL) is lower by 7% over the same time, implying the near- to medium-term outlook for EZA means a sense of adventure is required to get involved with the ETF.

iShares MSCI South Africa Index Fund

ETF Trends editorial team contributed to this report.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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