Can South Africa ETF Sustain Its Recent Rally?
The South African equity market has been on a roller coaster ride this month recording big, wild moves both ways. The market took a deep plunge after South Africa’s president Jacob Zuma replaced finance minister Nhlanhla Nene, after less than two years of his appointment, with law maker David Van Rooyen (who is relatively unfamiliar and unproven) on December 9. Per reports, Nene’s efforts to cut back spending was not agreed upon in the parliament. This political upheaval dragged down the South African currency to an all-time low and punished the stocks and bonds. Following the removal of Nene, Zuma faced a series of outrages and protests and cries for Zuma’s resignation were widespread. To contain the slide in the market and soothe political uproar, South Africa’s president Jacob Zuma immediately intervened and named well-regarded Pravin Gordhan as the new finance minister who has vowed to restrain the budget deficit and total public debt, Reuters . Market Impact Given the constructive changes in the finance ministry, the South Africa ETF – the iShares MSCI South Africa ETF (NYSEARCA: EZA ) – added about 8.9% on December 14. The ETF lost over 5.8% in the last five days and is off 28.4% in the year-to-date time frame (as of the same date). The ETF also hit a 52-week low on December 11 when shares of EZA were down roughly 42% from their 52-week high price of $73.08/share. Can the Uptrend Last? The fund has been massively beaten down this year by a flurry of issues. The looming Fed lift-off has already soured investors’ mood towards this emerging market. Moreover, South Africa is a commodity-rich nation. Since the greenback is soaring on an impending rate hike, commodity prices are falling fast as most of these are priced in U.S. dollars since one can buy the same quantity of any commodity by a few dollars now. Credit agency Fitch already cut South Africa’s rating on December 4 to barely one mark above the junk status and also added that the firing of Nene “raised more negative than positive questions.” Charts Give Bearish Cues EZA has a Zacks ETF Rank #4 (Sell) with a High risk outlook. For a technical look, the short-term moving average (9-day SMA) for EZA is well below the long-term averages (both 50-Day SMA and 200-Day SMA) signaling further downward movement. Also, EZA is currently trading way below the parabolic SAR indicating a bearish trend for the product. However, the only ray of hope is that the Relative Strength Index (RSI) is around 33.67, suggesting that the ETF is on the verge of entering the oversold territory and is thus due for a trend reversal. Still, for investors who believe that the recent rise in EZA will likely continue for quite some time, we have detailed the ETF below. After all investors should note that much of the Fed-induced blows are currently priced in the present EM valuations. Though emerging market investments will be edgy in 2016, repeated comments made by the Fed on a slow hike trajectory might not hit the EM bloc as badly as is being feared. Also, the fund (EZA) has just 5.3% exposure in materials and 6.7% in the energy sector, and should not be deeply affected by the slumping commodity market. EZA in Focus This ETF looks to track the MSCI South Africa Index. It has a major focus on large and mid-cap equities. The ETF invests about $283.2 million assets in 56 holdings. EZA carries high company-specific concentration risk, with Naspers Limited N Ltd ( OTCPK:NPSNY ) (23.87%), Sasol Ltd (NYSE: SSL ) (6.51%) and MTN Group Ltd ( OTCPK:MTNOY ) (6.28%) taking the top three spots of the basket. From a sector point of view, the fund is tilted towards consumer discretionary (35.7%) and financials (28.9%). The fund charges 62 bps as fees. Original Post