ETF Trends
ETF Trends

Emerging markets stocks and exchange traded funds have been surging this year, outperforming U.S. stocks in significant fashion, but South African equities could fall further behind broader gauges of developing world equities.

The iShares MSCI South Africa ETF (NYSEArca: EZA), the largest ETF dedicated to stocks in Africa’s second-largest economy, slumped 3.1% over the past week after data indicated the economy there is mired in a recession. More bad news for South African assets emerged Monday when Moody’s Investors Service lowered its rating on South Africa’s sovereign debt while putting a negative outlook on that rating.

“Moody’s Investors Service Analyst Zuzana Brixiova noted South Africa’s economy fell by 3.9% in 2016, and Moody’s forecasts growth below 1% in 2017 and 1.5% in 2018,” reports Dimitra DeFotis for Barron’s.

Earlier this year, EZA slumped after the government removed the country’s finance minister and his deputies.

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.

“Lower levels of growth and heightened uncertainty about policy direction and policymakers’ commitment to structural reforms have increased the risk of a weakening of the government balance sheet,” according to a Moody’s note, cited by Barron’s.

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 (the former finance minister) had “raised more negative than positive questions.”

“Moody’s downgraded the long-term issuer and senior unsecured ratings of the government of South Africa to Baa3 from Baa2. Moody’s also downgraded senior unsecured debt issued by ZAR Sovereign Capital Fund Propriety Limited, a special purpose vehicle whose debt issuance is ultimately the obligation of the South African government, to Baa3 from Baa2, with a negative outlook. South Africa’s long-term local-currency bond and deposit ceilings were lowered to A2 from A1, and the long-term and short-term foreign-currency bond ceilings lowered to A3/P-2 from A2/P-1, respectively,” according to Barron’s.

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.