Commodities Rally Chases Shorts From South Africa

For a couple of years as commodities prices struggled, plenty of single-country emerging markets exchange-traded funds struggled as well. A prime example of that theme was the iShares MSCI South Africa Index (ETF) EZA.

Stymied by South Africa's status as a major gold producer, the world's largest platinum producer and the second-largest palladium producer, EZA stumbled as commodities prices sank. For example, the South Africa ETF plunged 26 percent last year, while the MSCI Emerging Markets Index lost “just” 16.2 percent.

Knowing that commodities prices are key drivers of South Africa equities, it is reasonable to assume that with precious metals prices rebounding this year that EZA is participating. That assumption is validated by EZA's year-to-date gain of 17.4 percent, which puts the South Africa fund ahead of the MSCI Emerging Markets Index by a factor of two-to-one.

Shorts And EZA

One result of EZA's 2016 performance is that short sellers that previously targeted the ETF are being forced to cover those bearish positions in significant fashion.

Related Link: An ETF Idea For A Steady Emerging Market

“Investors have cut their short positions in the largest ETF focused on the country to the lowest level since 2010, data from Markit Ltd. show. That accompanied a surge in net capital inflows into 41 ETFs buying stocks in South Africa to a five-year high of $136 million in the first quarter, the data show,” according to Bloomberg.

Investors, to the extent that they can be, appear comfortable with the fact that South Africa could very well be the next emerging market to suffer a sovereign credit downgrade at the hands of one of the major ratings agencies. Maybe Turkey will beat South Africa to that dubious punch, but a rating downgrade is still on the table for Africa's second-largest economy.

EZA And Commodities

Interestingly, EZA is not heavily exposed to commodities stocks. The materials and energy sectors combine for just over 14 percent of the ETF's weight. In what is a departure among many single-country emerging markets ETFs, EZA is heavily exposed to the consumer as consumer discretionary stocks represent over 34 percent of the ETF's weight. Financial services names chime in at 30.1 percent.

“The bullish sentiment is a turnaround from central bank figures that showed South Africans moved cash overseas for a 16th consecutive quarter in the final three months of 2015, the longest streak of quarterly outflows since the five years through September 1999. Direct investments by South Africans abroad more than doubled in the fourth quarter to 37.4 billion rand ($2.5 billion), the central bank figures, released March 8, showed,” according to Bloomberg.