South Africa ETF: Too Much Risk Relative To Reward

You do not have to know a great deal about South Africa to know what its appeal is; specifically, investors have been capitalizing on the nation's ability to produce minerals and other resources.

Granted, one can discuss South Africa in terms of its pros and cons as a place to invest. It is the economic powerhouse on the continent of Africa. Gross Domestic Product has surged in recent years. Inflation appears tame. Even its foreign currency rating is slightly better than that of Mexico's.

Yet if we are going to get down to the base metal of the matter, South Africa's primarily known for its natural resource wealth. The top holdings of iShares MSCI South Africa Index (EZA) include highly correlated segments like energy, precious metals and commodities.

I'll be brutally honest- I find it hard to recommend an allocation to EZA. I see a bit too much risk relative to reward. (And that's not to say that EZA hasn't been quite rewarding!)

For example, if I want to get a healthy helping of natural resources, I might find less volatility and greater gains with iShares S&P GSSI Natural Resources (IGE). While resources took a walloping last week... a 7.6% rush for the exits... the iShares MSCI South Africa Index (EZA) witnessed a ghastly 11.5% pullback. (The last 6 months give a pretty good picture of South Africa's overall volatility.)

Granted, it may not be fair to compare the natural resources sector against the country. But then, are investors in South Africa genuinely looking at financial services, tech, biotech and health care companies?

There's enormous value in resource-rich country investing. Few dispute that global demand for resources is rising around the globe, particularly in China and India. Yet I see greater value in developed countries that are also rich in resources.

Canada and Australia are not only rich in resources, they are politically stable entities with surging economies of their own. It follows that the iShares MSCI Australia Index (EWA) and the iShares MSCI Canada Index (EWC) present a more compelling portrait.

Australia, in particular, has a competitive advantage over many other nations. As I have mentioned in previous posts, not only does Australia fuel the commodities/materials/resources boom in China, but its economic growth has been phenomenal.

Comments

[mitsuo]

Try the SPDR Middle East Africa ETF (GAF) which includes South Africa...

[African guyin Kenya]

I disagree with Gary about buying EWA, EWC or IGE instead of EZA. Among the 4 funds, EZA has the highest EPS growth rate (21%) and the 2nd lowest P/E ratio (13.59) according to Yahoo! Finance. I was in SA for 5 months between Oct '06 and Mar '07 and the boom is fantastic. Cranes, cars, and shoppers everywhere. The perceived risk is much more than the actual risk since the leadership is black.

[African guyin Kenya]

As I write this, EZA is up 24.83% since you trashed South Africa on Aug 1st.