New Regime Could Mean Lower Risk For South Africa ETF

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The iShares MSCI South Africa ETF (NYSEArca: EZA) is up nearly 8% over the past week with the primary catalyst behind the exchange traded fund's surge being the resignation of Jacob Zuma as president of one of Africa's largest economies.

Some analysts and market observers believe the departure of the controversial Zuma will reduce risk for South Africa's economy and related financial assets.

The country is a major gold producer as well as being as one of the top two producers of palladium and platinum in the world. South African miners have been enjoying improved margins due to a surge in prices on raw materials like iron ore and platinum while the rand currency depreciated against the dollar.

“The resignation of Jacob Zuma as president of South Africa reduces the risk of policy paralysis,” Fitch Ratings says. “Zuma's successor, Cyril Ramaphosa, will bring a greater focus to improving governance and strengthening economic and fiscal policy, which is likely to contribute to a recovery in business confidence and growth. Whether this will be sufficient to lead to a significant improvement in the government debt trajectory and trend growth is uncertain.”

The $516.3 million EZA follows the MSCI South Africa 25/50 Index and holds just over 50 stocks. EZA devotes 31.6% of its weight to financial services stocks and over 27% to the consumer discretionary sector. Consumer staples names account for 9% of the ETF's roster.

Even with Zuma's departure, some risks remain.

“As long as growth is too weak to significantly improve living conditions for the majority of the population, political pressure could lead to populist policies that harm growth or public finances,” said Fitch. “The ANC's adoption late last year of a resolution in favour of land expropriation without compensation points to such pressure, although Ramaphosa in his State of the Nation Address pledged to implement the policy in a way that minimises negative economic effects.”

EZA has a three-year standard deviation of almost 23%, which is well above the comparable metric on the MSCI Emerging Markets Index. The fund's trailing 12-month dividend yield is 1.5%.

For more information on the South African markets, visit our South Africa category.

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