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South Africa ETFs
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About South Africa ETFs |
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Emerging Markets: South Africa ETFs Overview and forecast
South Africa presence in the ETF market is made with two older unit funds, WisdomTree Dreyfus South African Rand Fund (NYSE:SZR) and iShares MSCI South Africa Index Fund (AMEX:EZA). South Africa is an interesting market, because these two funds represent respectively two of its economic strong points, EZA being an equity market fund, and SZR a currency fund.
The South African economy is actually two economies, in terms of investment: The domestic economy, and the big corporate economy, which receives a lot of interest from international investors. The domestic economy is a mix of old and new. South Africa's current economic status is a mix of situations involving post apartheid social issues and new initiatives. The corporate economy is at a remove from the domestic economy, being a small but solid group of corporate entities which is more aligned with South Africa's big exports and financial markets.
EZA concentrates on the traditional ETF model index approach, with a self explanatory list of weighted holdings in gold, platinum, and financial sector companies, and South Africa's top corporations. SZR works on the currency market with the South African Rand.
They're very different, as traders. EZA trades regularly in the hundreds of thousands of units, SZR in tens of thousands. The difference is the market focus, and if the two funds behave like opposites, they've both managed a respectable performance in the second quarter of 2009, EZA rising by 50% on its strong trade, and SZR almost equaling it on its thin trading volumes.
South Africa's equity and financial markets are directly plugged in to the global markets, and that's one of the reasons for this apparent dichotomy between a thriving financial market and a domestic economy which has been in a hole for a while.
Short term (6 months)
The equity market in SA has been responding exactly like global markets. It's a very clear, good match with the US market, in that respect. The South Africa ETFs charts mirror the US charts, almost exactly. That's an important behavioral clue to the performance of the SA market, as well as evidence of its lock step with global markets.
South Africa has recently been attracting strong Chinese investment. The Chinese have opted to base themselves in the advanced South African market for their investments and projects in Africa. That's a possible indicator of a very strong upside to the SA ETFs, because they are obvious investment vehicles for capital investment, by both private and sovereign capital funds.
Medium term (2 years)
South Africa's economy is a strange patchwork, and the obvious indicators are that the local corporations and markets need to capitalize, heavily, to raise the economy out of the heirloom issues of the past. That's not necessarily going to happen in a hurry, and some negative sentiment about policies from capital investors has put the brakes on and stalled some very necessary upgrading and development.
That situation will improve, mainly through inertia and rising demand, but there is a possible downside here. The world is looking for returns, and that's not an instant recommendation for investing in a difficult, relatively slow, economy. The general medium term view is that investment in SA requires analysis, and a clear indicator of returns potentials.
Long term (5 years)
In the longer term, South Africa will get a grip on its current issues, because it has to, to grow. The medium term issues can be expected to improve in the longer term, as methods are developed and capital finds its niches. This isn't an option, it's a necessity. The South African ETFs are holding interests in global market entities, and the corporations are world class, but the interface with a sluggish domestic economy is relevant, and investors need to see the connections, to form a view of long term prospects.
There is a potential long term downside, as a result of the economic situation. South Africa's ability to attract investment has been weakened by the perception of a lot of real social issues as counterweights to economic growth. That's not an entirely fair or realistic view, but the requirement to develop a much stronger "middle class" economy, where the domestic economy is a working machine, is reasonable, for investor confidence. Things need to be seen to be happening, and any improvement has to show results, not cosmetic effects, which are major investment turnoffs.
Qualifier to projections
This is a real test of investor nerves and ability to find the right investment markets, because of the nature of the South African economy. The economic issues facing South Africa aren't even political in nature. It doesn't matter who's in power, economic management is the public face of South Africa, and the primary guide to investors. The South African ETFs represent a core economic structure, on which the development of South Africa will be based.
The problem is that this economic model dates back to about 1970. The South African economy requires infrastructure, redevelopment, education facilities, and a greatly expanded domestic economy, to underpin large scale modern investment. The Chinese investment in South Africa could be the best possible indicator of modernization, because China's foreign investments are usually long term, strategic investments which are intended to grow and develop new markets. It will also encourage other foreign investment, over time. That said, the capacity of South Africa to respond effectively and grow is the big issue. South African investments will rise and fall on the basis of these criteria.
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Last Updated on: 2010-01-14 02:03:40 |
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