Resource-Rich Countries Fare Worse In Global Credit Crunch

Australia, Canada, and South Africa have long had thriving stock markets. The gains on the corresponding MSCI benchmark indexes had been superb for years; that is, they had been phenomenal until the big summer story... "global credit crunch."

Resource-rich nations have fared worse than other countries. That may be surprising to some. Yet the predominant thought process is, if the global credit turmoil shakes the global economy, the demand for resources will fall significantly. (That... and a complete reassessment of foreign market risk.)

Still, a funny thing happens when we look at the difference between these 3 countries in particular. While South Africa and Australia are down 20% from peaks, Canada has corrected only 10%.

Personally, I have never selected the iShares MSCI South Africa Index (EZA); in fact, I recently explained the excessive risk of South Africa in a recent post about the emerging market.

Remember, a 20% free-fall for an emerging market is no worse than the pullback in the summer of 2006. After all, if you're primarily intrigued by natural resources, the iShares Natural Resources Fund (IGE) takes care of your needs adequately.

Yet how does one explain the massive selling pressure on the iShares MSCI Australia Index (EWA)? Australia has seen 20% declines since the credit calamity went global. Isn't that drop more akin to an emerging market reaction? In contrast, the MSCI iShares Canada Index (EWC) has only shed 10% from the top, which is line with the U.S. total stock market.

The difference so far may rest with how each has handled the global credit issues. Australia recently raised its interest rates up from 6.25% to 6.5%. That might help the Australian dollar, but it's not going to help any stock market at a time when nobody wants/is able to lend. Here in the U.S., we're desperately seeking a rate cut!

Meanwhile, Canada has been in a wait-n-see mode. The Bank of Canada may have been expected to raise rates next month at their regularly scheduled meeting... but that was before the subprime mess. Now, the Bank of Canada is more likely to stand pat at 4.5%. (Of course, the meeting is not until September 5 for Canada... so a lot could happen between now and then.)

Although I am more apt to choose Canada's EWC today, I happen to like both Australia's EWA and Canada's EWC over the longer-term. I am still not sure I can find a good reason for an allocation to South Africa's EZA, however.

Comments

[RogerNusbaum]

I think it might be because BHP had about a 25% hit at its worst and BHP makes up 11% of EWA but a much smaller number for the ASX 200 so EWA did much worse than the ASX 200.

[LJ]

I think it has something to do with the currency yield. High-yielding currencies tend to attract carry traders, including the hedge funds and leveraged mutual funds. Carry trades tend to destablize the exchange rate between a high-yielding currencies and yen.

China is a country rich with resources, but the financial problems in the US didn't seem to affect China very much. I presume this was due to the fact that hedge funds have no access to the Chinese stock markets.

[African guyin Kenya]

If South Africa sucks, then why don't you put your money where your mouth is and short EZA? Obviously you won't since you're chicken. The reason why western journalists like yourself are poor while Fidelity Investments has multi-billionaire owners is because the latter know how to spot a bargain. According to Yahoo! Finance, EZA has a P/E of 12.68, an EPS growth rate of 20.36%, and a 5yr average return of 32.45%. Resources account for only 43%. While EZA has net assets of only $460.72m thanks to biased articles from poverty-stricken western journalists like yourself who are too chicken to short the stock, the JSE has a market cap of $370bn so we don't need your pennies.

www.jse.co.za/xbrl_fin...

[African guyin Kenya]

As I write this, EZA is up 24.83% since you trashed South Africa on Aug 1st.