What was once a burden to the iShares MSCI South Africa ETF (NYSEArca: EZA) is once again a blessing as the lone exchange traded fund dedicated to Africa’s second-largest economy is up more than 16% year-to-date and a jaw-dropping 37% over the past 90 days.
That burden-turned-blessing is South Africa’s commodities exposure. The country is a major gold producer as well as being as one of the top two producers of palladium and platinum in the world. South African miners have been enjoying improved margins due to a surge in prices on raw materials like iron ore and platinum while the rand currency depreciated against the dollar.
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. However, South African stocks are bucking negative sentiment that might be lingering toward the country’s bonds.
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.”
“Investors have cut their short positions in the largest ETF focused on the country to the lowest level since 2010, data from Markit Ltd. show. That accompanied a surge in net capital inflows into 41 ETFs buying stocks in South Africa to a five-year high of $136 million in the first quarter, the data show,” according to Bloomberg.[related_stories]
Last year, South Africa 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 account of balance of payments still under pressure, some observers argue that South Africa is more vulnerable to capital outflows, BusinessDay reports.
“The FTSE/JSE Africa All Share Index in Johannesburg has rallied 12 percent from a two-year low reached in January and the country has regained its position as the largest stock market in Africa and the Middle East. The gains were driven by a rally in commodity prices and the Federal Reserve’s reiteration of a dovish monetary policy,” according to Bloomberg.
iShares MSCI South Africa ETF
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.