The iShares MSCI South Africa ETF (NYSEArca: EZA) rose 8.3% last month even as the Market Vectors Gold Miners ETF (NYSEArca: GDX) plunged 11.9%. That is a surprising decoupling from mining equities for EZA given South Africa’s status as a major gold producer and that some analysts view South African gold miners as among the most vulnerable to further retrenchment in gold spot prices.
Even more surprising is that EZA rose in a month when the major physically-backed platinum ETF slipped 8.6% and the only palladium ETF trading in the U.S. rose just 1%. South Africa is the largest platinum producer in the world and the second-largest palladium producer behind Russia. [Metals Rebound Helping South Africa ETF]
Although the materials sector is less than 12% of EZA’s weight, or less than half the weight allocated to financial services, the fund’s largest sector weight, EZA is correlated to price action in precious metals miners. [South Africa ETF Dichotomy]
Exposure to the materials sector could again prove problematic for EZA because with gold prices laboring below $1,300 an ounce, analysts and traders are speculating about what life will look like for some miners if gold falls below $1,200 an ounce. The answer is not appealing and it is far less attractive if gold drops below $1,000 an ounce. [You Don’t Want to Know What Happens to Mining ETFs if Gold Falls Below $1,000]
EZA could face other headwinds. On Tuesday, the International Monetary Fund said Africa’s largest economy is falling behind other developing nations and must rapidly employ reforms in order to skirt economic crisis.
“South Africa’s growth has underperformed and vulnerabilities have increased considerably,” the IMF said in a report cited by Agence France Presse.
The IMF is forecasting GDP growth of 2% this year and 2.9% next year. Given South Africa’s reputation for political instability and EZA’s reputation as a higher-beta emerging markets ETF, those growth numbers imply significant risk because investors can get exposure to comparable growth rates with any number of developed market ETFs.
Unemployment is officially at 25%, but is closer to 35% including those who have given up looking for work. Around 50 percent of all young people are without a job, according to AFP. Further muddling the bull case for EZA, the IMF went on to say “Unemployment is officially at 25%, but is closer to 35% including those who have given up looking for work. Around 50% of all young people are without a job.”
The lending agency also said South Africa’s economy is vulnerable to shocks. EZA’s recent immunity to slumping metals prices is easily explained. The ETF’s largest holding is media giant Naspers at 13.2% of the fund’s weight. Naspers owns a third of Tencent Holdings, China’s largest Internet company, the shares of which have surged this year.
iShares MSCI South Africa ETF
ETF Trends editorial team contributed to this post.