Markets

Russian Plane Crash Puts this Egypt ETF in Focus

The Egyptian economy, heavily dependent on the tourism industry, was harboring hopes that this year will bring back of lot of what had been lost since the Arab Spring revolution in 2011. Tourism officials in the country had already declared this summer as one of the best in years for the industry. Occupancy rates in the beautiful Sinai resort town of Sharm el-Sheikh crossed an impressive 70% in June.

However, the country that saw years of political instability was struck with misfortune once again when Russia operated airline Metrojet Flight 9268 crashed in northern Sinai on October 31 after departing from Sharm el-Sheikh International Airport and on its way to Pulkovo Airport, Saint Petersburg, Russia. The plane accident, which killed 224 passengers on board, was considered as the deadliest in Egyptian territory.

Intelligence reports suggested that Islamic State militants in the Sinai Peninsula might have planted a bomb on board the Russian airliner causing it to explode. The Islamic State of Iraq and the Levant's Sinai Branch, formerly known as Ansar Bait al-Maqdis, has also claimed responsibility behind the incident (read: Egypt ETF in Focus on New Economic Investment; Growth Ahead? ).

Market Impact and the ETF

The incident severely impacted the Egyptian bourses. The economy's benchmark stock index dropped more than 9% since the incident (as of November 10, 2015). The stock market contracted more on the news of U.K. and Ireland cancelling flights to Sharm el-Sheikh and Russia suspending all flights to Egypt amid heightened safety concerns last week.

Tourism is the lifeline of the Egyptian economy and the incident will severely hit the tourist count at the beginning of a peak holiday season. In 2014, the industry contributed 12.6% to the country's GDP and accounted for 11.5% of total employment and 20% of foreign currency revenues. However, these statistics don't speak of the full potential of the industry as it is still struggling to recover from the political crisis in 2011 when President Hosni Mubarak was ousted.

International tourist count was 14.9 million in 2010 but stayed below 10 million since then. Most of the tourists in Egypt hail from the U.K. and Russia with most of them visiting the Red Sea resort towns such as Sharm el-Sheikh. Among them, Russia accounts for 30% of the tourist count, which brought about $2.5 billion last year.

The decline in economic activities in the tourism industry will undoubtedly hit other sectors of the economy as it will worsen the employment scenario as well as the foreign currency reserve crunch. Moreover, the threat of a terrorist activity will spoil the investment climate in the country (read : 3 International ETFs Beating SPY This Year ).

In the midst of these doldrums, the sole ETF focusing on the Egyptian economy will certainly be affected. Since the incident, shares of Market Vectors Egypt ETF ( EGPT ) have nosedived about 9% (as of November 11, 2015). The movement of this ETF is expected to become much more adverse in the coming days if the fear factor surrounding the incident intensifies. Let us take a look at this ETF in detail (see all Africa-Middle East Equity ETFs here).

EGPT, launched by Van Eck Global in February 2010, tracks the Market Vectors Egypt Index focusing on companies that are listed on an exchange in Egypt and generate at least 50% of their revenues from the country. The fund holds 28 securities in its basket and its top three holdings include Commercial International Bank, Talaat Moustafa Group and Orascom Telecom Holding. It is highly concentrated in its top10 holdings with an allocation of 57.6%.

As far as sector allocation is concerned, the product is highly concentrated in the financial sector with half of the total fund allocation, followed by double-digit allocation to telecom (13.6%), materials (10.5%) and consumer staples (10.4%).

The ETF is quite overlooked as it manages $34.5 million in its asset base and trades in a paltry volume of around 6,000 shares per day. It is highly expensive, charging 97 basis points from investors per year (read: 4 Country ETFs That Lost 10% Last Week ).

The near-term fundamentals of the fund look very weak as it has a Zacks ETF Rank #5 or 'Strong Sell' with a High risk outlook. Therefore, it is better to stay away from this fund until the ongoing crisis in Egypt dissipates to a tolerable point.

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MKT VEC-EGYPT (EGPT): 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.


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

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