Thanks in large part to rising precious metals prices, the iShares MSCI South Africa ETF (NYSEArca: EZA) has been a solid performer emerging markets single-country exchange traded funds. Year-to-date, the South Africa ETF is higher by 8%, bringing its 12-month gain to 25%.
South African equities have been rallying 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.
Last 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.
“We have kept to our fiscal commitment — we said we would continue with fiscal consolidation in a careful and balanced way, we said that we would taper off debt, we have kept to that to a large extent,” said Finance Minister Pravin Gordhan in an interview with Bloomberg.
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.
Some analysts also believed that palladium could continue to shine as tightening market conditions will continue through 2018. Traders have increased positioning in future market as automobile sales hit record highs, especially with rising automobile sales in China.
Along with its safe-haven link in the precious metals space, palladium is also more sensitive to economic cycles and enjoys heavy industrial demand, notably out of the automobile industry where the precious metal is used as an autocatalyst to remove harmful emission particles. China and the U.S., the world’s two largest automobile markets, use palladium in the production of catalytic converters.
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 is Africa’s second-largest economy behind Nigeria.
“Slow economic growth and political infighting are key factors rating companies have highlighted as risks to their assessments. Gordhan has had to balance efforts to boost the economy against the need to contain rising debt to fund the budget of Africa’s most-industrialized economy,” according to Bloomberg.