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Egypt ETF Plunges on Currency Devaluation

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Egypt entered into an uncharted territory as its central bank floated its currency for the first time in order to boost investment and ease dollar crunch. In consequence, stocks jumped the most in eight years, while the local currency nosedived almost 50% against the U.S. dollar (read:Will IMF Loan Boost the Egypt ETF?).

Egypt's central bank stated that the free float of the currency would reflect supply and demand better despite increasing volatility and uncertainty in the short term. It will also help in eliminating the black market for dollars, which has been thriving lately.

This move by the country’s central bank is expected to improve its external competitiveness, support exports and tourism and attract foreign investment in addition to aiding growth and job creation.

Egypt’s economy has been suffering for some years now, thanks to political unrest in 2011 and a string of terror attacks. This has led to a massive decline in tourism and foreign investments, key sources of hard currency. As a result, the country’s foreign reserve has dwindled to almost half since the uprising. A foreign-currency shortage has affected the domestic businesses badly. The country has been in a tight spot with its current account deficit hitting a record 6.7% of GDP in the first quarter.

Egypt, after free floating its currency, is looking to secure a $12 billion loan from the International Monetary Fund (IMF). As per the preliminary agreement with the IMF, Egypt will get parts of the loan over the next three years. However, the bailout still has to be formally approved by the fund's board.

While the government alongside the central bank has been implementing a series of reforms aimed at reviving the economy, a loan from the IMF could help speed up the process.

ETF in Focus

Keeping these points in mind, we highlight the sole ETF tracking Egypt–VanEck Vectors Egypt Index ETF (EGPT - Free Report) . The fund has lost 25.7% in the last five days as of November 4, 2016. Let us take a look at this ETF in detail (see all Africa-Middle East Equity ETFs here).

EGPT, launched in February 2010, tracks the MVIS 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 26 securities in its basket and its top three holdings include Global Telecom Holding, Commercial International Bank and Edita Food Industries. It is highly concentrated in its top 10 holdings with an allocation of 66.7%.

As far as sector allocation is concerned, the product is highly concentrated in the real estate and financial sector with each accounting for more than one-fourth of the fund allocation, followed by telecom (15.2%), materials (10%) and consumer staples (8.3%).

The ETF is quite overlooked as it manages $14.4 million in its asset base and trades in a paltry volume of around 38,400 shares per day. It is highly expensive, charging 98 basis points from investors per year. The fund has a Zacks ETF Rank #4 or ‘Sell’ with a High risk outlook (read: Bremain or Brexit: No Worries for EM ETF Investing).

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