El-Erian Likes Egypt; Time to Like the ETF?
The political and economic challenges faced by Egypt are well documented. Following the Arab Spring of 2011 that led to the end of Hosni Mubarak's regime, what looked like a promising frontier market economy struggled. The Market Vectors Egypt ETF (NYSE: EGPT), the lone ETF devoted exclusively to the North African country plunged, falling from around $18 at the time the revolution started in early 2011 to the $9.50 area late in 2011.
Amid a tenuous geopolitical situation in the Middle East and Egypt's own presidential election held earlier this year, speculation swirled that the country and the ETF could be vulnerable to a repeat of 2011.
Despite two nasty multi-month declines, the Market Vectors Egypt ETF been remarkably sturdy this year. In fact, the ETF has gained 32.2 percent year-to-date, making it one of the top-performing country-specific funds.
More gains could be on the way as at least one noteworthy investor is bullish on Egypt's economic prospects. In a piece on Foreign Policy titled "The Arabian Horse," PIMCO's Mohammed A. El-Erian highlights opportunities in the North African nation.
El-Erian notes some of the cautionary tales associated with the Egyptian investment thesis.
"Egypt's current economic situation is far from reassuring," El-Erian wrote in the piece. "Growth is insufficient, factories are operating well below capacity, and investment in new industry and equipment upkeep is way too low."
As is the case with some other developing nations, Egypt's unemployment rate is alarmingly high. El-Erian notes the official jobless rate in the country is 12.6 percent, but among the nation's youth, "the jobless figure is above 25 percent."
El-Erian, PIMCO's chief executive officer and co-chief investment officer, goes on to note many Egyptians live at or below the poverty and the country's savings rate is far from impressive.
"The fiscal deficit is running above 10 percent of GDP, contributing to higher borrowing costs and a weakening of the once strong debt dynamics. And over two-thirds of the country's stock of foreign reserves has been used up in the last 18 months, reducing the stock to about $15 billion," El-Erian wrote.
Still, El-Erian notes there are reasons for cautious optimism regarding Egypt's economy. The new regime recognizes the importance of economic growth and, "Egypt has the physical and human attributes to sustain high economic growth, fuel a dynamic labor market, and undertake a developmental breakout phase," El-Erian said.
El-Erian also highlighted the potential allure of Egypt's sizable domestic market, saying "Egypt has the potential to attract sustained surges of foreign direct investment."
EGPT is heavily focused on Egypt's domestic economy as diversified financials and bank stocks combine for nearly 29 percent of the ETF's weight. Adding to the fund's domestic bias is a 12.9 percent allocation to real estate names and a 4.6 percent weight to food and beverage stocks.
Egypt does face challenges on its way to economic prosperity, meaning EGPT faces challenges of its own in terms ascending to old highs. The bull case is that Egypt does have the potential to be economic stalwart in the Middle East, meaning EGPT has the potential to continue to its reign as a top-performing country-specific ETF.
"The Egyptian economy resembles an Arabian horse. It struggles to gallop and can be outright skittish when the surface is uneven and the destination is uncertain. But with firm footing and a clear destination, it can run with speed, endurance, and elegance," El-Erian wrote.
EGPT has $43.7 million in assets under management and charges an annual net expense ratio of 0.94 percent.
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