Egypt ETF Soars on U.S. Debt Deal
Shares of the Market Vectors Egypt ETF (NYSE: EGPT), the lone ETF devoted exclusively to the North African nation, surged nearly two percent today on volume more than triple the daily average. The catalyst for EGPT's bullish ways appears to be clear.
In an effort to help Egypt's fledgling democracy, the U.S. is close to a deal to forgive $1 billion in Egyptian debt. The pending debt relief package would come from earlier aid funds to Egypt that were not spent, the New York Times reported.
For EGPT, the debt relief headlines are the latest in a long line of successes this year. EGPT, which is not cheap with a net annual expense ratio of 0.94 percent, has had its detractors. The fund also struggled a bit earlier this year as it appeared Egyptians were not pleased with their choices in the country's first democratic elections following the end of the Mubarak regime.
To its credit, EGPT has been able to shake off political volatility and concerns about Egypt's fragile to be one of the year's top-performing country-specific ETFs. The fund is up 55.3 percent year-to-date and though still small in terms of assets under management, EGPT is attracting new capital. In late May, the fund had less than $44 million in AUM. That number rested at $51.6 million as of August 31.
Overall, Egypt owes the U.S. $3 billion and the U.S. has donated some $30 billion in aid to modernize Egypt's economy over the past 30 years, according to the United Press International.
The Obama Administration has made clear that bringing stability to Egypt and its economy is a priority and is in the process of negotiating loan guarantees for American businesses that invest in Egypt. If those ventures are successful, the volatile EGPT could make for a valid long-term bet. At the very least, the ETF appears to be one that would benefit should the President win reelection in November.
There are risks to the Egypt investment thesis beyond the country's frontier market status and the recent history of political volatility. As PIMCO's Mohammed El-Erian noted in August, Egyptian unemployment is rampant. El-Erian said that Egypt's official jobless number is 12.6 percent, but among the nation's youth, the figure is closer to 25 percent.
Egypt has also burned through its foreign reserves over the past 18 months, reducing the number to $15 billion, El-Erian noted.
EGPT is heavily focused on Egypt's domestic economy as diversified financials and bank stocks combine for about 30 percent of the ETF's weight. Adding to the fund's domestic bias is a 12.8 percent allocation to real estate names and a 4.6 percent weight to food and beverage stocks.
Considering that the current environment is unfavorable to emerging markets ETFs equities and ETFs and that EGPT has already run quite a bit this year, it might be hard for investors to envision further near-term upside in the ETF. On the other hand, it is worth noting EGPT is still more than 20 percent its pre-Arab Spring highs.
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