Inside the Surging Egypt ETF - ETF News And Commentary

By Zacks Equity Research,

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The emerging market space piled up heavy losses in 2013 and this trend continues this year as the Fed has finally started a measured taper. Sluggish currencies, rising inflation and political disorder also added to the woes of emerging markets. (read: Should Investors Avoid Emerging Market ETFs in 2014? ).

Despite dreadful conditions  in the broader space, some markets have managed to continue their uptrend. Egypt has lately shown signs of strength and is way ahead of most other developing nations to start the year. After struggling in the past three years, the Egyptian economy is turning the corner, as both political and economic situations seem to be cooling.

Bright Spots

Following the tough crackdown on the Muslim Brotherhood in July 2013, the Egyptian economy was supported by funding from several Gulf nations in recent months. The Gulf countries - Kuwait, Saudi Arabia, and the United Arab Emirates - have finally pledged $12 billion in financial aid, boosting business confidence and the future growth for Egypt.

This would result in capital inflows leading to lower interest rate, availability of foreign currency and rise in foreign reserves. Though foreign exchange reserves arestill 47% below $36 billion three years ago, it increased to $17.03 billion in December from $15.01 billion in the same month a year ago. Meanwhile, inflation eased to 12.5% annually in December after hitting the three-year record high 14.2% in November.

In order to regain more political and economic stability, the Egyptian government is pumping billions of dollars into the economy. It has already announced the stimulus package of $3.2 billion for economy and is planning for the second stimulus of $4.36 billion (read: 3 Best Performing Country ETFs of 2013 ).

Earlier this month, Fitch revised the economic outlook for the country from negative to stable, citing substantial improvement in its political condition. This represents the first upgrade since January 2011. In November, Standard & Poor's also maintained its stable outlook on Egypt.

The World Bank expects the Egyptian economy to pick up slowly from an estimated 2% in 2013 to 2.2% in 2014 and 3.3% in 2016. If achieved, this would be the highest growth rate for 2014 in four years.

If this isn't enough, Egypt is expected to reach to the  twenty-eighth position in the world by 2023 and twenty-second position by 2028 from the current forty-fourth position, as per the Centre for Economic and Business Research , if stability continues and no severe pain strikes the nation.  

Further, falling currency is bolstering exports from the country and stimulating domestic production.

Egypt ETF in Focus

With Egypt on the verge of recovery, it appears that investors are becoming optimistic on the country. In fact, the ETF tracking the region - Market Vectors Egypt Index ETF ( EGPT ) - is clearly outpacing the broad emerging market funds by wide margins, gaining nearly 9% in the year-to-date period (see: all the Africa/Middle East ETFs ). 

The fund tracks the Market Vectors Egypt Index, which comprises companies that are domiciled in Egypt or generate at least 50% of their revenues in the country. The fund holds 27 securities in its basket and amassed $51.2 million in its assets base. Expense ratio came in at 0.96%.

In terms of holdings, more than two-fifths of the total assets are invested in the financial sector, with about 8% weight assigned to the top holding - Commercial International Bank Egypt.

Outlook Still Cloudy

Despite several measures to boost economic growth, high debt levels, devaluation of the Egyptian pound and rising unemployment pose major risks to the economy (read: Is the Worst Ahead for the Egypt ETF? ).

The budget deficit increased to $10.8 billion in the first four months of the current fiscal year 2013-14 (July-October) as compared to $10.1 billion in the year-ago period. It is expected to rise to $27 billion for full fiscal year 2013-14 but would likely remain below $34.8 billion reported in fiscal year 2012-13.

Bottom Line

To sum up, although the Egyptian economy is showing some signs of stability, it still has a long way to go. Investors should note that more trouble could be in store for this nation ahead of the election and referendum on Egypt's revised constitution.

We currently have a Zacks ETF Rank of 5 or 'Strong Sell' rating on EGPT. This suggests that the longer-term picture is still very weak for this fund, and that investors should not be fooled by this recent surge. Further, high level of volatility associated with this ETF makes it unsuitable for many investors.

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MKT VEC-EGYPT (EGPT): ETF Research Reports

VANGD-FTSE EM (VWO): ETF Research Reports

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing ETFs
Referenced Stocks: EGPT , VWO

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