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Dramatic turns, one after another, in Egypt have given the country a hard time to put it mildly. The crisis deepened recently, when the military forced President Mohammed Morsi to quit.
A clash then ensued between the military forces and supporters of Morsi, turned deadly, as dozens were killed and scores more were injured. The Muslim Brotherhood and their opponents called for fresh mass rallies, renewing fears of another round of street violence over the ousting of Morsi (read: Egypt ETF in Trouble on Political Turmoil).
Boon or Bane?
Despite the violence, this shift away from Morsi was apparently welcomed news for the market, as growth of the most populous Arab country was thwarted under Morsi’s 12-month leadership. Economic deterioration with rising inflation, higher debt levels, devaluation of the Egyptian pound and rising unemployment had dampened investor confidence in the country and eroded support for the Islamist-backed government.
Inflation climbed to 21%, up from 3% in Feb 2011, when Mr. Hosni Mubarak was overthrown. Meanwhile, unemployment is currently at a record 13.2%, while government debt has risen by $10 billion to nearly $40 billion (read: Three Country ETFs Struggling in 2013).
Foreign exchange reserves had also plunged more than 50% from $36 billion in Dec 2010 to $13.5 billion in Mar 2013. Foreign exchange reserves suffered due to declining tourism revenues and massive capital outflows. While tourists continue to avoid the country; most global investors have adopted a wait-and-watch mode till the political situation stabilizes.
Despite the current turmoil, the main fund to target the nation, Market Vectors Egypt Index ETF (EGPT - ETF report) was up about 9% in the past week but is still down double digits year-to-date. Volume levels were also high, as the ETF saw nearly 3 times more shares exchange hands in the past week.
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 (mostly mid cap and small cap) in its basket and has amassed $30.4 million in assets so far in the year. Expense ratio is contractually capped at 0.94% until May 2014.
The ETF’s structure also contributes to the volatility. More than two-fifths of the total assets are invested in the financial sector, with more than 9% weight assigned to the top holding – Commercial International Bank (read: 3 Surging Financial ETFs Beating the Market).
Why is the ETF up?
Clearly some investors believe that the country will do much better in the post-Morsi environment and that brighter days are ahead for Egypt. Some are also probably banking on the funds from a long-stalled $4.8 billion loan from the IMF, which could help to put the economy back on track.
Additionally, the heightened level of stability and the relatively soon elections are promising for the nation, suggesting that a new military dictatorship will (hopefully) not follow in the wake of Morsi. In fact, Justice Adly Mahmoud Mansour, head of High Constitutional Court, has temporarily taken the presidential oath until new elections can take place, further strengthening the stability in the rocky nation.
Lastly, there have also been positive developments from some of Egypt’s neighbors in the region. Both the UAE and Saudi Arabia pledged, or are on the verge of pledging, billions in aid, suggesting that other nations in the region are supporting the developments and are at least somewhat optimistic about the country’s medium term future (see more in the Zacks ETF Center).
Clearly, the country is facing political issues, and heightened protests suggest continued turmoil in the near term for Egypt. The recent surge though is promising, and suggests that the country may be able to battle through its current batch of woes.
Still, the volatility in the ETF tracking this nation looks to be immense, with 5% moves—both up and down—pretty common. There is also an ever-present worry that elections will be delayed or that outright civil war will take place, either of which could cause a significant sell-off in EGPT.
For this reason, we are maintaining our Zacks ETF Rank of 5 or ‘Strong Sell’, on this ETF, as more trouble might be in store for the nation. Big gains are also clearly possible in short time periods, but with the incredibly high level of uncertainty in the market, it might be a prudent idea to stay away for the time being until more is sorted out in the troubled nation.
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