South Africa country-specific exchange traded funds have fallen behind global markets, but an improving political environment may be the catalyst needed to turn the economy around.
Year-to-date, the iShares MSCI South Africa ETF (NYSEArca: EZA) rose 3.0% and Franklin FTSE South Africa ETF (NYSEArca: FLZA) added 2.7%. South Africa ETFs were previously among the worst performers as the economy suffered from contractions, along with the general risk-off attitude in 2018.
However, Oliver Bell money manager at T. Rowe Price Group Inc., argued that South African President Cyril Ramaphosa, whom just came off an electoral win, will help turn the tide after “a decade low” for investor sentiment and economic stability amid rampant political corruption, Bloomberg reports.
“I’m very overweight,” Bell told Bloomberg. “It’s set up where if you can surprise positively — sort out Eskom, put corrupt people in prison and drive a reform agenda – there could be quite a big upswing there.”
Bell believed that South Africa bulls could enjoy a big outperformance considering that domestic funds are largely invested outside the emerging market and most foreign investors remain underweight. The money manager also saw value in all sectors tied to South Africa’s domestic economy, notably banks, retail and domestic industrial companies.
“We feel the time is approaching where international equities should start outperforming U.S. equities,” Bell added.
The U.S. dollar strength has been supported by an interest rate differential between the U.S. and the rest of the world. If the Federal Reserve cuts rates and U.S. does not fall into recession, the international market outlook could immediately change.
South African stocks, along with the rest of the emerging markets, have suffered from a stronger U.S. dollar as the returns were lowered when converting from local currencies back to USD. Meanwhile, the specter of a slowdown, especially brought on by trade concerns, dragged on risk sentiment across the board and hit the riskier emerging segment particularly hard.
For more information on the South African markets, visit our South Africa category.