Turmoil In Egypt Creating A Buying Opportunity

May. 7.13 | About: VanEck Vectors (EGPT)

At the current prices and level of negative sentiment, Egypt is setting up for an excellent buying opportunity. Everything currently seems to be going wrong for Egypt. The country's unemployment rates (12.3%) is at five-year highs, the Egyptian pound is having a currency crisis, the country has its slowest growth in years, manufacturing is contracting severely, and a Biblical level plague of locusts is severely damaging the country's wheat supply. The Morsi administration is also on thin ice as protestors have sparked civil unrest and cities such as Port Said are out of the government's control.

With all of the turmoil in Egypt right now, then why am I looking for a buying opportunity? The reason I am bullish is due to the combination of the country's cheap valuation and the limited geopolitical downside from here. In terms of valuation Egypt's market cap is currently just 23% of GDP versus its historical average of 31%. The world average market cap is currently 6% above historical averages, and many emerging markets trade at 30-50% premiums.

On the geopolitical side, Egypt's situation is not as precarious as perceived. The country is having capital flow problems, but the combination of IMF loans and US foreign aid will restructure Egypt's government's finances more manageable. In addition, the Egyptian military which is main non-political enforcer of government credibility has not abandoned the Muslim brotherhood. As long as the military does not undermine the civilian government, a regime collapse is highly unlikely.

Overall, the turmoil in Egypt creates an excellent buying opportunity. Cheap valuations and reduced geopolitical chaos will put in a intermediate bottom for the Egyptian stock market. In the context of the current global liquidity bubble, Egyptian stocks can rise quickly to catch up to other emerging markets. Due to resource mismanagement and overpopulation, Egypt is unlikely advance in development anytime soon, but its equity market can recover to at least to pre-Arab spring levels. The only way US investors can invest in Egypt directly is through the Market Vectors Egypt Index ETF (NYSEARCA:EGPT). At current prices, Egyptian stocks are down nearly 24% from October highs and trading near six month lows.

Disclosure: I am long EGPT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.