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Jacob Zuma Survives No Confidence Vote: ETFs to be Impacted

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President Jacob Zuma survived the eighth no-confidence motion by opposition parties trying to unseat him. The motion was defeated 198 to 177 and Zuma held on to power. Zuma and his entire cabinet would have had to resign had the motion been passed.


Although Zuma describes this incident as a victory, his party, the African National Congress (ANC) is now weaker than ever, as the margin of victory was a lot lesser than expected. The motion required 201 of the 384 votes to pass, hence it fell just 24 votes short.


The opposition cited the result as a show of optimism and strength in their fight against the apparent corrupt practices of Zuma and as a means to invigorate confidence in them to fight him in the courts.


South Africa’s economy has been hit by recession for the first time in eight years as it contracted an annualized 0.7% in the first quarter of 2017. This followed a 0.3% contraction in the preceding three months (read: Recession Hits South Africa: Avoid this ETF).


Zuma was under scrutiny for maintaining illegal ties with the Gupta family and the firing of his finance minister Pravin Gordhan (read: Avoid South Africa ETF Amid Political Uncertainty).


Moreover, the South African Reserve Bank reduced its growth forecast for this year to 0.5% from its earlier forecast of 1%. South Africa's unemployment rate was 27.7% in the second quarter of 2017.


Let us now discuss the most popular South Africa ETF in detail.


iShares MSCI South Africa ETF (EZA - Free Report)


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


EZA has AUM of $427.75 million and charges a fee of 64 basis points a year. Consumer Discretionary, Financials, and Consumer Staples are the top three sectors with 34.96%, 24.98%, and 8.40% allocation, respectively (as of August 7, 2017).  Naspers Limited, Sasol Ltd, and Standard Bank Group are the top three holdings of the fund, with 25.15%, 5.21%, and 4.94% exposure, respectively (as of August 7, 2017). EZA has returned 1.28% in the last one year and 15.16% year to date (as of August 8, 2017). It currently has a Zacks ETF Rank #4 (Sell) with a High risk outlook.


We will now compare the performance of EZA with 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 such as South Africa, Egypt, Nigeria, Morocco, Kenya, and Mauritius. It also invests in offshore listings of companies incorporated outside Africa but generate at least 50% of their revenues from the continent.


It has AUM of $76 million and charges 79 basis points in fees per year. The fund has 30.06% exposure to South Africa. Financials, Materials and Consumer Discretionary are the top three sectors with 31.4%, 23.3%, and 12.7% exposure, respectively (as of July 31, 2017). Naspers Limited, Commercial International Bank Egypt Sae, and Centamin Plc are the top three holdings of the fund, with 8.15%, 7.75%, and 4.18% exposure, respectively (as of July 31, 2017). The fund has returned 11.20% in the last one year and 16.99% year to date (as of June 6, 2017). As such, AFK currently has a Zacks Rank #3 (Hold) with a Medium risk outlook.


Below is a chart comparing the year-to-date performance of the two funds.


 
Source: Yahoo Finance


Bottom Line


The South African ETF has underperformed the broader Africa based ETF. Owing to the high degree of political turmoil in the region, we believe it is prudent to avoid investing in the region as of now.


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