Thanks in large part to rising precious metals prices, the iShares MSCI South Africa ETF (NYSEArca: EZA) is up more than 21% good for one of the best performances among all single-country emerging markets exchange traded funds.
EZA has been accruing that impressive year-to-date showing in the face of lingering concerns that one or more of the major credit ratings agencies would downgrade South Africa’s sovereign debt rating to junk status. Concerns about South Africa’s sovereign credit rating are once again in focus.
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Earlier this year, Standard & Poor’s reiterated a BBB- rating, the lowest investment-grade rating, on South African sovereign debt. In May, Moody’s Investors Service surprised global investors by actually upgrading its rating on South Africa to two levels above junk territory.
EZA, the largest South Africa ETF, is off more than 2% over the past week and resides just 3.5% above its 200-day moving average.
“Our own sovereign ratings model has South Africa at BB/Ba2/BB. The agencies have been very patient with South Africa, but we think these latest political convulsions may be the last straw and trigger downgrades to sub-investment grade. Recent downgrades to Turkey underscore the fact that 1) politics are important and 2) agencies won’t hesitate to take away investment grade ratings,” according to a Brown Brothers Harriman note posted by Dimitra DeFotis of Barron’s.
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.
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.”
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“S&P is scheduled to publish its rating review December 2. Elsewhere, Fitch cut its local currency rating by a notch to BBB- back in July, matching its foreign currency rating that it affirmed in June. Both ratings have stable outlooks, which we find very surprising,” according to the BBH note posted by Barron’s.