South Africa's investment thesis is bifurcated. On one hand,
this is Africa's largest economy and by far the most advanced.
The country is the world's largest platinum producer and a major
producer of gold and palladium.
South Africa's ascent up the global economic ladder has
prompted some experts to add the country as the "S" in BRICS,
joining the country with Brazil, Russian, India and China. Even
if not all can agree that South Africa belongs in the BRIC house,
it is a part
of the CIVETS acronym
.
Those superlatives do not obfuscate South Africa's challenges,
which include a history of political volatility and an
unemployment rate that stood at 24 percent at the end of the
second quarter. In a post on Dr. Mark Mobius' blog, Franklin
Templeton Senior Vice President and Managing Director Johan Meyer
explores the good and the bad facing investors in South
Africa.
Noting South Africa's history of political divisiveness, Meyer
also highlighted the country's ability to reinvent itself, saying
"While significant social and economic problems still persist
today, I believe South Africa and its people appear potentially
well positioned for greater long-term prosperity."
Reinvention aside, South Africa is still viewed by many
outsiders as a materials/precious metals play. The $506.3 million
iShares MSCI South Africa Index Fund (NYSE:
EZA
) devotes almost 19 percent of its weight to materials stocks,
making the sector the second-largest in the ETF.
"Commodities, particularly metals and minerals, are very
important to South Africa's economy," Meyer said. "South Africa
is one of the world's leading mining and mineral processors, with
roughly three-quarters of the world's platinum production and a
significant share of others including palladium, gold, manganese
and diamond."
Recent labor unrest at South African mines has plagued EZA and
other ETFs with significant exposure to the country. The strikes
have
also punished the rand, South Africa's
currency
.
Perhaps investors have become jittery after learning of the
oppressive conditions in which South African miners toil to bring
diamonds, gold and platinum to market. Whatever the reason, EZA
is off 4.4 percent in the past month. The SPDR S&P Emerging
Middle East & Africa ETF (NYSE:
GAF
), which allocates almost 91 percent of its weight to South
Africa, has lost 91 percent over the same period while the
WisdomTree Dreyfus South African Rand ETF (NYSE:
SZR
) has given up 3.7 percent.
Strife in the mining sector epitomizes the risks inherent with
investing in South Africa. As Meyer noted, the sector accounted
for 8.6 percent of the country's GDP in 2010.
"...if the global economy improves, higher commodity prices
could be a boost to the South African economy. While there is
some concern inflation on a global scale could accelerate given
the easy monetary policies and stimulative measures central banks
(particularly in developed markets) have been engaging in, at the
moment inflationary pressure appears to be contained in South
Africa...,"
Meyer said in the post
.
The country has Africa's most advanced banking system and, as
Meyer notes, the 18th-largest stock market in the world.
Unfortunately, South African banks are far from immune from the
strikes. Earlier this month, Moody's Investors Service pared its
rating on the foreign deposit ratings of the five largest banks
in South Africa. In September, the ratings agency cut South
Africa's sovereign debt rating to Baa1 from A3. Financials
account for 25.4 percent of EZA's weight and 28.5 percent of
GAF's weight.
The good news is that the International Monetary Fund expects
South Africa's GDP to grow 2.6 percent this year and additional
improvement is expected in 2013. Citing that statistic and the
country's corporate governance policies, Meyer said "I think we
are in a good position to seek opportunities arising from the
long-term growth potential in South Africa, and across this vast,
developing continent."
Those looking for more diversity when it comes to Africa ETFs
should consider the Market Vectors Africa ETF (NYSE:
AFK
). South Africa is the ETF's largest country weight at 25.6
percent, but Nigeria and Egypt combine for 38.6 percent of the
fund's weight. AFK has significantly outperformed EZA and GAF
this year.
For more on South Africa and ETFs, click
here
.
(c) 2012 Benzinga.com. Benzinga does not provide investment
advice. All rights reserved.