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Avoid South Africa ETF Amid Political Uncertainty

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The current government in South Africa led by President Jacob Zuma has come under fresh scrutiny.  This time Zuma has been criticized for a Cabinet reshuffle that favors ministers who are loyal to him. The Finance Minister Pravin Gordhan was replaced by Home Affairs Minister Malusi Gigaba while Deputy Finance Minister Mcebisi Jonas was replaced by Sifiso Buthulezi.

Gordhan was seen as a positive for markets. He was admired for standing up to the President and the corruption prevailing in his government. Apart from Gordhan, nine other ministers who Zuma considered disloyal to him were replaced. Three of the six major leaders in the governing party, the African National Congress, strongly opposed Gordhan’s dismissal. This move is seen as an effort to reassert the President’s strength amid a bitter battle for his successor.

The rand fell 4% against USD after Gordhan was sacked. It was down 8% last week. Many South African companies slammed the move saying the country’s credit rating now faces the risk of a downgrade.

Zuma has been asked to step down on allegations of corruption. He has been accused of being influenced by the members of an India-born Gupta family and their interests. The Democratic Alliance, South Africa's chief opposition party said that it will call a vote of no-confidence in the President in parliament.

Therefore, it’s evident that there is high political turmoil in the region and it’s prudent to avoid the South Africa ETF.

iShares MSCI South Africa ETF (EZA - Free Report)

This fund offers investors exposure to the emerging market nation of South Africa by investing in companies based out of the nation.

EZA has AUM of $402.92 million and charges a fee of 64 basis points a year. Consumer Discretionary, Financials, and Consumer Staples are the top three sectors with 35.7%, 30.6%, and 8.5% allocation, respectively.  The fund has high concentration risk, with over 59.6% allocated to the top 10 holdings. EZA generated 4.96% in the past one year and 5.4% in the year-to-date time frame (as of March 31, 2017). It currently has a Zacks ETF Rank #4 (Sell) with a High risk outlook.

We will now compare the performance of EZA to a broader Africa based ETF, AFK (see all Africa-Middle East Equity ETFs here).

VanEck Vectors Africa Index ETF (AFK - Free Report)

This fund has over 50% allocation to Africa, covering economies like South Africa, Egypt, Nigeria, Morocco, Kenya, and Mauritius. It also invests in offshore listings of companies incorporated outside of Africa but who generate at least 50% of their revenues from the continent.
It manages AUM of $67.3 million and charges 80 basis points in fees per year. The fund is concentrated with 43.3% of its assets allocated to the top 10 holdings. Financials, Materials, and Consumer Discretionary are the top three sectors with almost 68% of fund assets allocated to them. The fund returned 11.84% in the past one year and 5.51% in the year-to-date time frame (as of March 31, 2017). As such, AFK currently has a Zacks Rank #3 (Hold) with a Medium risk outlook.

Source: Yahoo Finance

To Conclude

The broader Africa based ETF AFK outperformed EZA by almost 6.9% in the past one year.  It is evident that EZA fell drastically when rumors of Pravin Gordhan being fired were doing the rounds and continued to go down when the news broke. There is reduced confidence in the nation owing to corruption and high political uncertainty. Hence, we believe it is prudent to avoid the South Africa ETF, EZA. There is high uncertainty in the region and we therefore think it’s best to remain on the sidelines for now (read: Avoid Nigeria ETF amid Economic Challenges).

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