Egypt's ETF: Pricey but Promising

by: Carl T. Delfeld

Last week, New York-based asset manager Van Eck Global launched the first Egypt ETF: Market Vectors Egypt ETF (NYSEARCA:EGPT). As usual, timing is everything with new ETFs and, while Egypt should be on your emerging market shopping list, with a price to book value over two and a trailing price to earnings ratio over twenty, valuations seem too high right now to add EGPT to your emerging market portfolio.

With about 80 million people, Egypt is the most populous country in the Arab world and the 16th largest in the world. Its per capita GDP is below the global average, trailing behind other emerging markets such as Brazil, South Africa, China, but ahead of India. If it were a U.S. state, Egypt would rank 23rd in terms of nominal GDP, roughly the same as my state of Colorado.

EGPT’s holdings tilt toward the financial sector, which make up about 40% of the benchmark. Egypt’s recently consolidated financial system is among the strongest in the developing world with a loan-to-deposit ratio for Egyptian banks at just 50%, compared to ratios as high as 120% in less stable economies.

Egypt’s economy is much more diversified than many in the region. Oil and gas make up only about 15% of the country’s GDP, compared to as much as 50% for many oil rich states. In addition to a strong financial sector, tourism, agriculture and industrials account for significant portions of GDP.

Egypt has recently enacted some positive market-oriented policy reforms. Since Ahmed Nazif was elected prime minister in 2004, tax rates have been slashed, registration costs for new businesses have been reduced and the Egyptian Stock Exchange has been opened to foreign companies. As a result, foreign direct investment has jumped from almost nothing to $12 billion in 2009. Egypt's real economic growth has averaged 4.9% annually since the start of the last decade and 6.3% for the three years ending December 31, 2009.

EGPT seeks to replicate an index of companies that are domiciled and primarily listed in Egypt, or that generate a majority of their revenues in the country. As of January 31, 2010, the Egypt Index included 28 securities; the top three index holdings were Commercial International Bank, Orascom Construction Industries (OTC:ORSDF) and Orascom Telecom Holding SAE (OTC:ORSTF) (8.5%, 8.4%, 7.9% of the Index, respectively). Sectors with a greater than 10% weighting as of January 31 included Financials, Telecommunication Services, Industrials and Materials.

According to Trang Ho of IBD, Egypt's market has outperformed all other countries in the region so far this year and in the past 12 months. The MSCI Egypt index vaulted 89.55% in the past 12 months vs. 36.28% for the MSCI Arabian Markets index.The Egypt index returned an average annual 1.12% in the past three years, 17.31% the past five years and 12.68% the past 10 years. Egypt, Jordan and Morocco are the only three countries in the region with as much as 10 years of market history in the MSCI database.