More Problems Looming for South Africa ETFs

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.