South Africa stocks and country-specific exchange traded fund are rebounding off earlier June lows, but high inflation and weak growth are still causes for concern.
The iShares MSCI South Africa ETF (NYSEArca: EZA) has jumped 7% since its June 5 low. EZA is still down 0.8% year-to-date.
The South African economy, though, may be stuck in a stagflation, or persistently high inflation with high unemployment and lower growth. According to the South African Reserve Bank, growth will average only slightly above 2% this year and the next while inflation is expected to increase to an average 6.1% in 2016 from 4.9% this year, reports Dan Bogler for the Financial Times.
Weighing on the growth outlook, consumers are growing cautious as the country suffers through high debt, a record 26% unemployment rate and electricity shortages.
Inflation has been rising after a drought in the south pushed up food prices. Additionally, oil prices have been rebounding.
The rising inflation will have an effect on consumer sectors. EZA’s largest sector component is consumer discretionary at 31.3%, followed by financials 29.9% and telecom services 11.8%.
Meanwhile, the under-invested Eskom, the country’s national utility company that supplies 95% of power, does not have enough capacity to meet demand, which has caused outages and disrupted small businesses. Moreover, Eskom is applying for a 13% tariff increase to fund investments.