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Egypt ETF has been one of the best performing ETFs this year (up 30% year-to-date) but its run has been anything but smooth.
The ETF had a disastrous performance last year due to the political turmoil in the country.The fund rebounded earlier this year as the political situation appeared to be stabilizing, with the election of Mohamed Morsi, as the first democratically elected president of the country. (Greece ETF: Still Defying All Odds)
But the peace in the Arab world's most populous country proved to be short-lived. The Egyptian stocks plunged more than 10% when President Morsi issued the constitutional declaration granting himself sweeping powers and immunity for his decisions from judicial review. The move--seen as power grab by the Egyptian public--stirred nationwide protests.
Recently, the president tried to defuse the situation by seeking to speed up the adoption of the new constitution, which would automatically relinquish his authority. He also said that the far-reaching powers assumed by him were temporary and were not aimed at making him a dictator.
Economic situation in the country remains uninspiring with widening budget deficit, plunging foreign exchange reserves and rising unemployment—with youth unemployment close to 25%. (Time to Stuff the Turkey ETF into Your Portfolio?)
The Egyptian stock market and the ETF are at further risk if the IMF loan announced last week gets delayed or falls apart. The $4.8 billion loan from IMF is crucial for putting the economy back on track. The loan will support the implementation of a national program aimed at widespread fiscal and monetary reforms. The program also seeks to reduce wasteful expenditures (including popular fuel subsidies) and raise revenues.
With growing opposition, Mr. Morsi will not find it easy to find support for the unpopular economic reforms. The unrest may also undermine €5 billion aid pledged by the European Union earlier this month. (Buy These Emerging Asia ETFs to Beat China, India)
The IMF loan and the EU aid are crucial lifelines for the economy devastated by massive political unrest in the last couple of years. GDP growth fell from 5.1% in 2010 to 1.8% last year, and is expected to come down further to just 1.5% this year, according to IMF. The budget deficit widened to 11% of GDP last year.
Foreign exchange reserves have plunged by more than 50% from $36 billion in December 2010 to just about $15 billion--about three months’ of import cover. The central bank spent a significant part of the reserves in defending the weakening currency.
Foreign exchange reserves also suffered due to declining tourism revenues and massive capital outflows. While tourists continue to shun the country; most global investors have adopted a wait-and-watch mode till the political situation stabilizes.
Attracting foreign investments and tourists is also not going to be easy in near future in view of the volatile political situation. (Volatility ETFs: Three Factors Investors Must Know)
EGPT tracks the Market Vectors Egypt Index, which is comprised of companies that are domiciled in Egypt or generate at least 50% of their revenues in Egypt. The fund has $42 million in AUM, invested in 26 securities (mostly mid-cap and small-cap).Expense ratio is contractually capped at 0.94% through May 2013 and may go up to 1.20% afterwards.
The ETF’s structure also contributes to the volatility. More than 45% of its assets are invested in the financial sector, with more than 9% weight assigned to the top holding--Commercial international Bank. Further small cap securities account for more than 43% of the holdings.
While it is most likely that the ETF will bounce back if the political crisis diffuses, the overall outlook for the economy does not look very promising. Further given its high volatility, we think that this ETF is suitable only for high-risk, high-reward seeking investors.
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