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South Africa ETFs in Focus as Zuma Resigns

The South African economy suffered extensive political woes under Jacob Zuma’s term. Moreover, the economy has performed very poorly since Zuma took office in 2009.

Zuma announced his resignation Wednesday night, following which market-friendly Deputy President Cyril Ramaphosa took office. This led to a rally in South African stocks and the rand, as the markets now expect more business-friendly reforms from Ramaphosa.

Economic Scenario

Per a Bloomberg article, GDP growth in South Africa has averaged a mere 1.6% since Zuma was elected, very low for an emerging market.  The South African economy grew 0.8% year over year in the third quarter of 2017, easing from an upwardly revised 1.3% expansion in the previous quarter.

The S&P downgraded the country’s credit rating to junk status in November 2017. It lowered South Africa’s local currency credit rating to BB+ from BBB. However, following Zuma’s exit, markets are placing bets on the South African economy, which is finally making a comeback. JSE Africa All Share Index increased 3.7% on Feb 15, 2018, caused by the euphoria following Zuma’s resignation (read: South Africa ETFs in Focus on Rating Downgrade).

The South African rand increased more than 12% against the dollar since Ramaphosa took the realm of the African National Congress. South African stocks have been increasing on the back of a stronger currency, which in turn translates into stronger consumer and business confidence and higher expected economic growth.

What Lies Ahead?

Investors are putting high hopes on Ramaphosa, a former chairman of Africa's biggest telecom operator MTN Group and expect him to turn around the economy plagued by corruption and mismanagement. Optimists expect Ramaphosa to engage in new ties with foreign miners and usher in new foreign investment by introducing pro-growth reforms.

“He’s going to have [to] come out sounding pretty strong. It’s been a bruising battle to get Zuma out and he needs to show he is the undisputed leader and he has the momentum to get the work going,” Per Hammarlund chief emerging markets strategist at SEB told Reuters.

Moreover, the economy faces increased risks from the budget presentation due next week. The new administration has to convince investors that it is capable of bringing about the required changes in the country’s administration, to make investments in the corruption-plagued nation attractive. The damage caused by Zuma has been massive for the economy and it’ll be interesting to witness how Ramaphosa plans to bring about a turnaround in the country.  

Let us now discuss the most popular South Africa ETF in detail.

iShares MSCI South Africa ETF EZA

This fund offers exposure to the emerging market nation of South Africa by investing in companies based out of the nation.

EZA has AUM of $536.8 million and charges a fee of 62 basis points a year. Financials, Consumer Discretionary and Consumer Staples are the top three sectors with 31.0%, 26.9% and 9.2% allocation, respectively (as of Feb 14, 2018).  Naspers Limited, Standard Bank Group and Firstrand Ltd are the top three holdings of the fund, with 19.5%, 6.0% and 5.4% exposure, respectively (as of Feb 14, 2018). EZA has returned 32.4% in a year and 6.9% year to date (as of Feb 15, 2018). It has a Zacks ETF Rank #4 (Sell) with a High risk outlook.

We will now compare the performance of EZA with a broader Africa-based ETF, AFK (see all Africa-Middle East Equity ETFs here).

VanEck Vectors Africa Index ETF AFK

This fund has more than 50% allocation to Africa, covering economies such as South Africa, Egypt, Nigeria, Morocco, Kenya and Mauritius. It also invests in offshore listings of companies incorporated outside Africa but generate at least 50% of their revenues from the continent.

It has AUM of $79.9 million and charges 79 basis points in fees per year. The fund has 32.1% exposure to South Africa. Financials, Materials and Telecom are the top three sectors with 36.7%, 19.7% and 12.9% exposure, respectively (as of Jan 31, 2018). Naspers Limited, Commercial International Bank Egypt Sae and Attijariwafa Bank are the top three holdings of the fund, with 8.1%, 6.1% and 5.1% exposure, respectively (as of Feb 15, 2018). The fund has returned 21.2% in a year and 4.5% year to date (as of Feb 15, 2018). As such, AFK currently has a Zacks Rank #3 (Hold) with a Medium risk outlook.

Below is a chart comparing the one year performance of the two funds.

Source: Yahoo Finance

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ISHARS-S AFRICA (EZA): ETF Research Reports
 
VANECK-AFRICA (AFK): ETF Research Reports
 
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