South Africa: Currency or Country?

From the perspective of a U.S. Investor, an allocation to South African equities is largely a bet on the performance of the South African Rand. In fact, over the last 12 months 47.8% of the volatility exhibited in the iShares MSCI South Africa ETF (Symbol: EZA) is attributable to the South African Rand.  Meanwhile, just 40.7% of EZA volatility is attributable to global equity market risk, and only 4.1% of EZA volatility is attributable to country specific risk. As a result, positive returns in EZA are likely to be accompanied by strength in the South African Rand, and or, weakness in the U.S. Dollar.  As an illustration, stress testing of the South Africa ETF suggests that EZA would rally 10.1% if the U.S. Dollar were to weaken 10% versus the Euro. Importantly, recent volatility of the South African Rand is second only to the Argentine Peso, and that risk translates into more volatile equity returns.  Accordingly, the range of potential returns for South Africa is relatively wide, and this helps to explain a portion of South Africa’s negative risk ranking below. Over a one month investment horizon, we estimate that returns for EZA have a 95% chance of remaining between -12.94% and +12.94%. This compares to China’s (MCHI) ±9.62% range and Emerging Markets’ (EEM) ±8.14% range. Although the South African Reserve Bank is expected to raise benchmark interest rates by another 1% this year (potentially stemming Rand weakness), the consensus forecasts suggests 5.2% Rand depreciation vs. the U.S. Dollar through Q2 2014. Lastly, South Africa is not very leveraged to Gold prices. Scenario analysis suggests that a 10% rally in gold prices would yield a 2.35% gain in EZA.


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Disclosure: This brochure is strictly informational and should be used for research use only. This brochure should not be construed as advertising material. The opinions expressed are not intended to provide investing or other advice or guidance with respect to the matters addressed in this brochure. All relevant facts, including individual circumstances, need to be considered by the reader to arrive at investment conclusions to comply with matters addressed in this brochure. Remember that investing involves risks, as the value of your investment will fluctuate over time and you may gain or lose money. You should seek advice from your financial adviser before making investment decisions. Investment risks are borne solely by the investor and not by AGA. AGA is an independent investment advisor registered with the SEC. All disclosures, marketing brochures, and supplemental firm sheets are available upon request.

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