NAPRF - EZA: South African Equities Look Expensive

• EZA gives U.S. investors the chance to invest directly in South African equities through a U.S.-listed, USD-denominated ETF.
• Unfortunately, South African equities look expensive. While the USD/ZAR exchange rate is probably significantly overvalued, there is still the risk that ZAR remains cheap for some time.
• In other words, I think that the equity valuation gap (which is unfavorable) runs the risk of closing more efficiently than the FX valuation gap (which could persist for years).
• EZA is also exposed to Naspers' valuation problem with regard to its large investment in Tencent. EZA is therefore not only risky from an equity valuation perspective, but also from a single-stock perspective.
• Naspers represents over 20% of the EZA portfolio, and therefore overall, I do not think EZA is a "clean" instrument for gaining exposure to South African equities.

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