As the fourth-largest producer of gold in the world, the
fortunes of the South African economy are often viewed as hitched
to the performance of the yellow metal itself. When it comes to
, the correlations between gold and South African equities are
not always as intimate as some investors think.
For example, in the past month, the iShares MSCI South Africa
Index Fund (NYSE:
) has slumped 0.7 percent while the SPDR Gold Shares (NYSE:
) is higher by 0.2 percent. That indicates that EZA does not
always move in lockstep with gold futures.
Nor is EZA a lock to respond favorably when production of
gold, platinum and palladium declines. That much was affirmed
earlier this year when, even though platinum and palladium
amid labor unrest in South Africa
, EZA did not. South Africa is the world's largest platinum
producer and the second-largest palladium producer behind
One obvious reason for the EZA's recent turbulence is its
exposure to mining equities. The ETF devotes 18 percent of its
weight to the materials sector and several marquee gold and
silver miners appear among the fund's top-10 holdings.
"Appearing among the top ten weightings in the fund are names
including Anglogold Ashanti Limited, Impala Platinum Holdings,
and Gold Fields Ltd. There are currently 52 individual equity
names represented in the underlying basket of EZA," said Street
One Financial Vice President Paul Weisbruch in a note published
While the exposure to mining names has been a drag on EZA, it
is worth noting the fund has sharply outperformed mining ETFs in
the past month. Over that time, the Market Vectors Gold Miners
) and the Global X Silver Miners ETF (NYSE:
) have plunged 7.46 percent and eight percent, respectively.
Year-to-date, GDX is off nearly eight percent while EZA has
jumped 6.2 percent. Still, EZA has lagged the broader emerging
markets universe as measured by the iShares MSCI Emerging Markets
Index Fund (NYSE:
"Year to date, EZA has lagged the broader MSCI Emerging
Markets Index, up 5.46% versus the benchmark rallying 8.03%
during the same time period. However, EZA has provided a relative
safe haven in the context of Emerging Markets countries in the
trailing five year period, as the ETF is down only 7.70% versus
the MSCI Emerging Markets Index losing 16.48% during this time
frame," said Weisbruch.
With regards to EZA, there is an easily defined bull/bear case
for the fund and South Africa at large. The country is Africa's
largest economy and the continent is viewed by many foreign
investors as the last great untapped investment frontier. For its
part, EZA is diverse at the sector level as financials account
for a larger percentage of the ETF's weight than do materials
names. Consumer discretionary stocks are just behind materials in
the pecking order and telecommunications names receive an
allocation north of 13 percent.
The bear case revolves around the adverse impact labor strife
can have and has had on the rand, South Africa's currency. Last
month, Standard & Poor's paring South Africa's credit rating
by one notch to BBB with a negative outlook as labor tensions in
South Africa. Speaking of labor woes, South Africa's unemployment
rate of over 20 percent cannot be ignored, either.
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