South Africa is the largest economy in Africa. Last year, the
country joined the group of fast growing economies of BRIC, adding
the "S" to the acronym to make it BRICS. It is one of only four
African countries that have been classified as upper-middle income
countries by the World Bank.
South African economy has done well since its transition from
Apartheid in 1994. The economy has grown at an average rate of 3.3%
while the inflation has remained modest within 3% to 6% range. The
country has a well developed financial system and modern
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South Africa has been endowed with vast natural resources. The
country is largest supplier of platinum (~67% of total supply) in
the world and also one of the top producers of gold, diamonds and
other precious metals like palladium.
South Africa's main exports are gold, diamonds, platinum and
other metals and minerals. The European Union is the largest
trading partner (~29% of the exports) while about 14% of the
exports go to China. (
Read: Africa ETFs-Three Ways To Play (EZA, AFK,
The economy grew at 3.1% in 2011, but is expected to slow down
to 2.7% in 2012 and then rebound to 3.4% growth in 2013 (per IMF
estimates). The central bank has left its benchmark repo rate at
5.5% (a 30-year low) since November 2010, in its efforts to aid
Among the negatives, the country is among the worst in the world
in terms of income inequality, which is further exacerbated by low
employment growth in the country. Savings and investment rates also
The unemployment rate is close to 24% currently; in fact it has
remained above 20% for the past 15 years. About 70% of the
country's youth are unemployed and about 86% of the country's
unemployed are black. For approximately a third of the South
Africans, government grants are the only regular income.
All three major rating companies have lowered their outlook for
South Africa's debt to negative from stable in the past six months.
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Despite significant reforms in past 10-15 years, the government
still had wide control over the nation's economic activity.
Further, market liberalization measures now seem to be on the back
burner as the government struggles to deal with issues like high
spending and corruption.
While South Africa has been expanding trade with the neighboring
African nations (which now account for about 27% of the exports),
the growth is currently constrained by the recession in the
Eurozone and slowdown in China.
Compared to the size of the economy and external trade, the
level of foreign exchange reserves is low (~$48 billion),
contributing to increased volatility of the currency, which remains
vulnerable to commodity prices and global risk perception. The
currency generally moves in positive correlation with gold
The Rand had gained about 30% between 2009 and 2010 but lost
almost all gains and fell to its two year low in the second half of
Due to above constraints, the upside for South Africa ETFs may
be limited in the near-term. For investors looking to benefit from
growth in the emerging markets, better opportunities exist in some
Latin American countries like Colombia and Peru.
However Africa is too important a region to be ignored by the
investors. Given its vast natural resources and low correlations
with most other markets, investments in Africa may continue to be
rewarding in the long-run. For investors seeking exposure to
Africa, we think South Africa is a better option compared with some
frontier market countries, which have high political instability
and growth potential comes at the cost of significant risks and
high volatility. Below we take a look at the two ETFs (equity and
currency) that provide exposure to South Africa.
MSCI South Africa Index Fund (
EZA seeks to track the MSCI South Africa Index, which is a
capitalization weighted, float-adjusted index of publicly traded
securities in the South African equity market. The index aims to
capture 85% of total market capitalization.
The fund currently has $524.3 million in AUM and holds 50
stocks. The fund assigns heaviest weight to the financials
securities (27%), followed by materials (20%) and consumer
discretionary (16%) stocks. The fund has returned 17.96% to the
investors since its inception in February 2003.
EZA charges 59 basis points annually to the investors and has
returned 10.73% year-to-date. MTN Group, the African telecom giant
is the largest holding (10.6%).
WisdomTree Dreyfus South African Rand Fund (
SZR seeks to achieve the returns that reflect the money market
rates in South Africa and changes in the value of South African
Rand (ZAR). The ETF invests in high quality US money market
securities and enters into forward contracts or swaps to gain
exposure to South African money market instruments. The fund was
launched in June 2008 and has returned 7.69% in since
Current AUM for the ETF is $4.9 million, expense ratio is 0.45%
and it has returned 5.64% year-to-date.
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