Down 26.6% this year, the iShares MSCI South Africa ETF (NYSEArca: EZA) is one of the worst-performing major emerging markets exchange traded funds and despite a recent pop in South African equities, betting on significant upside for EZA in 2016 could prove to be losing wager.
Few of Africa’s equity markets have reflected oft-cited 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. [South Africa ETFs in Focus]
When Standard & Poor’s downgraded Brazil’s sovereign credit rating to junk status in September, market participants immediately began pondering which emerging market would be next to suffer the junk downgrade fate. South Africa was one of the first to be mentioned.
Earlier this month, Fitch Ratings pared its rating on South African debt to just one level above junk while S&P reduced its outlook on the country’s bonds to negative from stable.
Last week, “lowered the outlook to negative from stable on 10 South African governments including Cape Town and Johannesburg after lowering the outlook on South Africa’s sovereign rating” earlier in the week, reports Dimitra DeFotis for Barron’s.
South African stocks recently surged after President Jacob Zuma reinstated Pravin Gordhan as finance minister, calming market nerves. Zuma fired the previous finance minister, Nhlanhla Nene, for a relatively unknown lawmaker, David van Rooyen, but ultimately decided on reappointing Pravin Gordhan, reports Renee Bonochris for Bloomberg. Gordhan was the finance minister from 2009 to May 2014 when he was replaced by Nene.
Looking beyond the political hoopla, many still believe South Africa’s economy has its work cut out for it as the government tackles high unemployment and high debt. Credit agency Fitch recently downgraded South Africa to just one notch above speculative-grade status and stated that the dismissal of Nene had “raised more negative than positive questions.” [South Africa ETF’s Precarious Position]
“Moody’s said large cities, which account for a quarter of the South African population — and regional governments are exposed to the country’s economic struggles, and “large cities — will continue to register high demand for welfare benefits and infrastructure. In addition, they feature moderate-to-high debt levels, which add rigidity to their budgets,” according to Barron’s.
iShares MSCI South Africa ETF
