South African GDP contracted by 2.2% in the first quarter of 2018, marking the worst growth in nine years. The agriculture sector fell a massive 24.2% in the first quarter on account of poor horticulture output, followed by mining and manufacturing, both of which fell by 9.9% and 6.4% respectively. Trade activity slowed due to reduction in consumer spending (retail, food, and auto) and lower growth of trade activity (read: South Africa ETFs in Focus as Zuma Resigns).
The sluggish performance of the South African economy took a toll on the currency, Rand which reached 13.28 on Jun 8, the lowest since Dec 18, when Cyril Ramaphosa was nominated as the president. Ramaphosa has announced that he is looking at a target of 3% GDP growth in the current fiscal even against the backdrop of slower first-quarter performance. Consumer Price Inflation (CPI) grew 4.5% in April on a year-on-year basis. The central bank has indicated that if inflation rises, hike in the interest rate in the near future is a possibility (read: Fed, Trade & Global Politics to Rule June: 6 ETF Picks).
Due to inflationary pressures, exports fell by 16.5%, while imports declined by 6.5% as per government data declared on Jun 5. Decrease in the import of machinery and equipment is worrying investors as it indicates that business growth was at a standstill in the first quarter, putting pressure on the annual fiscal targets of the government. The economy remains fragile as foreigners are holding more than half of the government debt bonds. The failure of the primary sector to generate growth has been a concern for analysts as it creates a massive chunk of the employment in South Africa.
What lies Ahead?
Ramaphosa has encouraged greater fixed investment spending, along with strong exports for long-term sustainable economic growth. The president, while in G7 conference in Canada, announced a $100 billion investment drive in the next five years, for stabilizing the country’s economy. As he was the former chairman of the MTN group, investors are hopeful that he will be able to turn the corruption plagued country into a stable developing economy, with strong investor confidence.
As the economy slows down, let us focus on a South Africa ETF.
iShares MSCI South Africa ETF (EZA - Free Report)
The fund has exposure to the large and mid-sized companies in the South African stock market and tracks the investment results of the MSCI South Africa 25/50 Index. It has lost 11.35% in the YTD frame due to poor economic performance by South Africa. It has 53 stocks in its basket and charges an annual fee of 62 basis points. The fund has an asset base of $437.9 million and has average daily trade volume of 525,700 shares. The top individual holding in this fund is Naspers Ltd with a weight of 23.3%, while Sasol Ltd and Standard Bank are the next two with holdings of 6.3% and 6.2%, respectively. As for sector outlook, Consumer Discretionary and Financials are the most prominent sectors, which control 29.1% and 28.3% of the portfolio, respectively, while other minor allocations make up for the remaining 40%. The fund has a Zacks ETF Rank #4 (Sell) with a High risk outlook (read: 4 Best Performing Sector ETFs of May).
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