Despite a tumbling currency and plunging commodities prices, the iShares MSCI South Africa ETF (NYSEArca: EZA) has outperformed the MSCI Emerging Markets Index on a year-to-date basis.
That is to say EZA has been less bad than the emerging markets bad as the South Africa ETF has slid about 16% compared to a 20% loss for the emerging markets index. More global investors and companies are taking a look at Africa for the growth opportunities in some rapidly expanding frontier economies. According to the Corporate Council on Africa, over 180 multinational companies, are considering or are already investing in Africa, reports Dina Gusovsky for CNBC.
However, few if any of the continent’s equity markets have reflected that long-term optimism this year. South African stocks have proven particularly vulnerable due to the country’s status as a major producer of precious metals, such as gold, palladium and platinum.
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%. [South Africa ETFs in Focus]
Compounding EZA’s woes is the perceived vulnerability of the South African economy, Africa’s second-largest behind Nigeria, to rising U.S. interest rates.
“Portfolio outflows have increased lately as a response to growing domestic and global forces, which prompted the South African Reserve Bank (SARB) to raise rates last month [the repo rate is at 6%]. We don’t see any bottom for South Africa just yet and expect the South African Rand (ZAR) to continue its fall in the months to come … The recent rate hike given falling core inflation and benign export performance could limit the fall in value of the rand in the next few months, but the path of least resistance is still down. The country still needs to adjust significantly in a context of growing volatility in the emerging market space,” according to a note by Pavilion strategists posted by Demitra DeFotis of Barron’s.
Earlier this year, South Africa, a major metals producer, saw its trade deficit widen to about 4.5% of GDP after a wave of strikes damaged the mining industry and sharp fall in exports. With the current accoutn of balance of payments still under pressure, some observers argue that South Africa is more vulnerable to capital outflows, BusinessDay reports.
iShares MSCI South Africa ETF
