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Summary

  • Overview of South Africa's markets.
  • Political and economic weakness, notably mining strikes, weigh on the economy.
  • A look at the related country-specific ETF.

By Todd Shriber & Tom Lydon

All things considered, the iShares MSCI South Africa ETF (NYSEARCA:EZA) has had a fine year so far, with a gain of 9.4%.

That is an impressive showing for EZA, which tracks a country rife with economic weakness and geopolitical weakness. Without the benefit of Thursday's gain, EZA would be down in the month since incumbent Jacob Zuma was elected to a second five-year presidential term, keeping the African National Congress in power along the way.

EZA, the largest ETF tracking an African country, could still face a bumpy road.

"Chronically high joblessness - coupled with persistent income inequality and substandard delivery of public services - will remain contentious topics of debate irrespective of the fact that the ANC won the national ballot in a landslide, with 62.5 percent of the electorate voting in favor of preserving the status quo," said S&P Capital IQ in a new research note.

Labor strife in the country's mining sector is often cited as one of the largest hurdles faced by the South African economy. The country is the largest platinum producer and the second-largest palladium producer in the world, and the prices of those precious metals have jumped this year as South African mine strikes near their 20th consecutive week.

"Protracted and spreading work stoppages by laborers in South Africa's all-important mining industry remain at the core of the economy's descent since early 2011. Aggregate economic activity has abated 2.2 percentage points to 1.6 percent during the past two years - much of which is attributable to decreased ore and mineral extraction in the platinum and other precious metals mining industries. In fact, according to official statistics, the precipitous plunge in the production of platinum group metals, the largest component (24.6 percent) of the nation's mining output index, accelerated to 44.3 percent in March, an 8.5 point deterioration in the annual rate of production from a month earlier," said S&P Capital IQ.

EZA allocates just 10.1% of its weight to the materials sector. However, the ETF's upside could be limited, as foreign investors are growing dissatisfied with Zumba's lack of action to restart mining output.

Additionally, South African stocks are pricier than the broader emerging markets universe. Stocks in Johannesburg trade at 15.1 times forward earnings, compared to 11.2 times for a broader emerging markets index, according to S&P Capital.

South Africa is the fifth-largest country weight in the Vanguard FTSE Emerging Markets ETF (NYSEARCA:VWO), the largest emerging markets ETF, at 9.7%. It is also the fifth-largest country weight in the iShares Core MSCI Emerging Markets ETF (NYSEARCA:IEMG), at 7.4%. S&P Capital IQ rates both ETFs as overweight.

iShares MSCI South Africa ETF

(click to enlarge)

Disclosure: I am long IEMG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Source: Macro Woes Could Hamper South Africa ETF