General Election Results Could Bolster South Africa ETF | ETF Trends

As South Africa’s general election will be finalized and tallied in the weeks ahead, investors may find an opportunity in the country-related exchange traded fund.

The iShares MSCI South Africa ETF (NYSEArca: EZA) has been gaining momentum in recent weeks, rising 10.2% over the past month, and the South Africa ETF could continue to strengthen on a favorable result from the emerging country’s upcoming elections.

According to UBS Group AG, the South African election outcome could see the ruling party win 55% to 60% of the vote, which would bolster shares in banks and insurers, retailers, locally focused industrial companies, property firms and telcos, Bloomberg reports.

EZA includes a hefty 31.6% tilt toward financials, followed by 29.2% consumer discretionary, 12.6% materials, 8.0% consumer staples and 7.2% communications.

The African National Congress will tally votes in the May 8 poll where many expect President Cyril Ramaphosa will strengthen his position, providing the current administration the ability to carry out investor-friendly changes.

Aveshen Pillay, director of equity derivatives sales and structuring at UBS in Johannesburg, argued that a strong result for the ANC may trigger a rally in South African assets on expectations of greater policy certainty, better management of state-owned companies and an improved outlook for growth.

UBS pointed to areas like financials, retailers, industrials, property and telcos that would benefit the most from lower bond yields, a stronger currency and improved growth and consumer sentiment.

While South African equities look expensive, “opportunities exist within sectors such as financials and property stocks benefiting from lower bond yields, and retailers and food producers on attractive valuations relative to history and exposed to the consumer,” Pillay told Bloomberg.

For example, UBS singled out names like Absa Group, Capitec Bank Holdings, FirstRand Ltd. and Standard Bank Group Ltd.

EZA includes a 2.6% tilt toward Absa Group, 1.4% to Capitec, 4.9% to FirstRand and 5.5% to Standard Bank Group.

“Expect lower yield environment and lower cost of equity to support performance for local banks. Banks should also benefit from improvement in consumer sentiment and growth outlook. Policy clarity could provide additional driver for corporate borrowing and investment,” according to UBS.

For investors looking for the continued upside in emerging market assets, whether driven by a weakening USD or continued developments around trade, the Direxion MSCI Emerging Over Developed Markets ETF (NYSEArca: RWED) offers them the ability to benefit not only from emerging markets potentially performing well, but from emerging markets outperforming developed markets.

Conversely, if investors believe that resolutions to the big issues impacting sentiment today are in motion, the Direxion MSCI Developed Over Emerging Markets ETF (NYSEArca: RWDE) provides a means to not only see developed markets perform well, but a way to access a convergence/catch-up in performance of DM relative to EM, a spread that has clearly widened over the past 6 months.

For more information on the South African markets, visit our South Africa category.