Ramaphosa and the case for South Africa ETFs

Mar 1st, 2018 | By | Category: Equities

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South Africa’s new president, Cyril Ramaphosa, could strengthen the investment case for South Africa ETFs, such as the £145m iShares MSCI South Africa UCITS ETF listed in Europe which has seen significant net inflows of around £80m over the past quarter.

South Africa's new president, Cyril Ramaphosa

South Africa’s new president, Cyril Ramaphosa

With a background in business, Ramaphosa is setting out to revive investor confidence in the rainbow nation.

Ramphosa takes the reins at a time of economic and political uncertainty in South Africa after years of a deteriorating investment outlook under his predecessor, Jacob Zuma.

This culminated with Standard and Poor’s downgrade of the nation’s local currency credit rating from BBB (lower medium investment grade) to BB+ (sub-investment grade) in November last year.

According to the World Bank, South Africa’s unemployment rate reached 27.3% in 2017.

Ramaphosa was elected head of the ANC in December 2017 in a tightly fought contest against Zuma’s ex-wife Nkosazana Dlamini-Zuma. Although the next general elections in South Africa are only scheduled for May 2019, infighting between factions of Ramaphosa’s political party – the African National Congress (ANC) – culminated in President Zuma’s resignation on 14 February and Ramaphosa being sworn in to office shortly thereafter.

In his first state of the nation address as president of the country, Ramaphosa said: “Our prosperity as a nation depends on our ability to take full advantage of rapid technological change.” This ambition, coupled with his intentions to stamp out corruption within the ANC, could potentially boost investment inflows into the country.

Investors have so far responded positively to Ramaphosa’s ascension to South Africa’s top job in what some analysts have referred to as the “Ramaphosa rally”.

Since 18 December 2017, the date Ramaphosa was elected as head of the ANC, the rand has strengthened 8.5% against the dollar from 13.0 USD/ZAR to USD/ZAR 11.9. The FTSE/JSE Africa Top 40 Index, a proxy for the South African stock market, grew roughly 5% during December 2017 and into early January 2018, before the recent global equity market sell-off. The index is now trending upwards once more.

The South African bond market has also responded favourably to the election, with yields on ten year South African Government bonds tightening from their high around 950 basis points (bps) in mid-November 2017 to 810 bps on 20 February 2018.

The extent to which the recent pick up in investor sentiment will continue depends largely on the success of Ramaphosa’s plans for economic and political reform. Investors betting on a positive outcome may wish to consider ETFs as a low cost investment vehicle to gain exposure to the South African market.

The largest of these ETFs in Europe is the aforementioned iShares MSCI South Africa UCITS ETF USD (SRSA LN). The fund provides exposure to South African large and mid cap equities. It was launched on 25 Jan 2010 and has a total expense ratio of 0.65%. The fund trades on London Stock ExchangeDeutsche Borse and SIX Swiss Exchange.

The ETF tracks the MSCI South Africa Index. The index has 52 underlying equity securities and covers approximately 85% of the South Africa’s free float market capitalization. Over the last five years, the index has delivered a 5.2% annualised growth rate, just below that of the MSCI Emerging Markets Index at 5.74%.

Potential investors in this fund should note the large exposure to internet and media group Naspers, which has a weight of just over 30%.

Investors concerned with this level of stock-specific risk might want to consider the Lyxor South Africa (FTSE JSE TOP 40) UCITS ETF (AFS LN). This ETF tracks the FTSE/JSE Top 40 Index which consists of the largest 40 companies ranked by investable market value from the parent all-share index. As a result of this free-float adjustment the index hands a reduced weight of 23% to Naspers. Still large, but less that the MSCI index underlying the iShares fund.

The Lyxor fund was launched in 2007 and has around £28m in assets. Its TER is 0.65%.

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