New Egypt ETF Offers Exposure to Growing African Economy

 |  Includes: AFK, EGPT, GAF
by: World Market Pulse

When we speak of Egypt, the first thing that comes to mind is the images of the Great Pyramid at Giza, the Nile Delta and the ancient Egyptian civilization. Far from being a civilization located on both sides of the river Nile, the modern day Egypt is the most populated country in the Middle East and the third most populous on the African continent. Despite technically being considered part of geo-economic area called Middle East Egypt lies in the continent of Africa and its per capita GDP is below the global average, trailing behind other emerging markets such as Brazil, South Africa, China, but ahead of India. 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.

Investors wanting to invest in the growing Egyptian economy can do so via the Van Eck Global launched the Market Vectors Egypt Index (NYSEARCA:EGPT) which is the first US traded Egypt ETF. The fund launched on 18th February 2010, invests in 28 companies that derive at least 50 percent of their revenues from Egyptian operations. The fund comes with a price tag of 0.94 percent. EGPT is the latest off-the-beaten-path country ETF from the fast-growing Van Eck, which recently launched ETFs tied to Poland, Indonesia and Vietnam as well. EGPT follows the Market Vectors Egypt Index, providing exposure to publicly traded companies that are domiciled and primarily listed on an exchange in Egypt or that generate at least 50% of their revenues in Egypt. The Egypt ETF has a heavy weight in the financials (42%) and industrial materials (31%) sectors, a common occurrence among large cap-focused emerging markets ETFs

EGPT: Sector Breakdown

Financials 42%
Telecommunications 17%
Industrials 16%
Materials 14%
Energy 4%
Consumer Discretionary 3%
Consumer Staples 2%

EGPT: Top Ten Holdings

Commercial International Bank 8.48%
Orascom Construction 8.44%
Orascom Telecom Holding 6.81%
EFG-Hermes Holding 6.60%
Mobinil-Egyptian Mobile Serv 5.88%
Egyptian Kuwaiti Holding 5.77%
TMG Holding 5.39%
Elswedy Cables Holding 5.13%
Al Ezz Steel Rebars 5.02%
Telecom Egypt 4.59%

Egyptian Stock Market

The EGX 30 is the main index of the Egyptian exchange. The EGX 30 is comprised of the 30 largest stocks traded on the exchange, and is quoted in U.S. dollars. A total of 179 stocks were listed on the Egyptian exchange in early 2010 and another 27 were trading over-the-counter. Regarding market capitalization, Egypt is the second biggest African market after South Africa. Many stocks are very liquid and can be traded easily and with low transaction cost. Foreign participation is still quite low, as it is in most other African markets.

From the perspective of intermarket analysis, Egypt is closely correlated with the Arabian markets. Egypt had performed equally to the Arabian markets during the crisis in 2008, but regained ground better in the year 2009. According to bloomberg data, the historic rolling correlation of the EGX 30 Index with MSCI World Index is very low, offering global investors a significant risk reduction of their overall portfolios. The 12-month rolling correlation, based on daily data, was ranging between -0.15 and +0.2 from 1999 to 2008, and climbed to +0.2 to +0.3 in 2009.

In the current market scenario, high yielding stocks have become increasingly attractive among fund managers as some counters like Telecom Egypt, Oriental Weavers, and Pachin offer high dividend yields to investors. The latest Consumer Price Index (CPI) figure is 12.8 % in February 2010. However, core inflation, which excludes the cost of fruits and vegetables as well as administered prices, eased to 6.9% year-on-year from 7.4% year-on-year in January. In its World Economic Outlook , the IMF expects Egypt to record an economic growth of 4.5% in 2010 and 6.0 % in 2011. This positive outlook should be reflected in rising stock prices.

Overview Of The Egyptian Economy

Egypt has been an economy in transition since the early 1990s, after undergoing an Economic Reform and Structural Adjustment Programme that made the move from central planning towards a market economy. Despite the progress achieved in the first ten years, towards the end of the 1990s, economic growth was adversely affected by internal problems (slow pace of economic reform) and external factors (slowdown in the international economy and increased global competition). Rates of economic growth fell dramatically in the early years of the new millennium, and Egypt’s share of world exports dropped. Egypt has however 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.

Egypt embarked on a sweeping financial and economic reform program several years ago. The country reformed its banking sector and is working on simplifying other business services. Egyptian officials are also still focusing on bringing down inflation, which had hit double digit levels last year amid surging commodity prices around the world. Even with all the financial meltdown globally, Egypt's economy is projected to grow by over 5% in the fiscal year ending in June 2010. Foreign direct investment, which along with tourism, the Suez Canal and worker remittances, make up the key revenue sources for the country, is expected to be about $10 billion in the coming fiscal year.

Although the EGPT is still very new, once it’s been around long enough to establish a long-term trend line, it may be worth a look for any investor keen for focused emerging market exposure in a growing country.

Favorable Environment

The current conditions in Egypt are conducive to conducting business successfully. The government is making a concerted effort towards attracting international companies to the country, and in line with this, several projects have been initiated to improve the investment climate even further. The economy is diversified and investment opportunities exist in almost every sector. The reforms of the Egyptian government have brought Egypt to the economic fore. Bureaucracy has been reduced considerably, but still needs further improvement in order to give sustainable results. Unemployment may be reduced to 8.5% according to government data, but taking unknown unemployment numbers into account, independent experts assume a value of around 20% or higher. More investment in education is needed to provide a sufficient number of qualified workers.

Risks To Egypt ETF

Of course, no ETF investment is risk proof and so is Egypt. The major obstacles facing Egypt’s economy include inflation and government subsidies. Inflation, which is largely driven by increases in food prices, has surged near 25% in recent years, although more recently it has been brought down into single digits. Egypt is targeting a 6% to 8% range for inflation this year.

Investing In Africa

Investing in Africa is high risk for many reasons, including currency fluctuations, poorly developed markets and political risk. Yes, there are still some unstable countries, but the number of African democracies has jumped from just four in 1990 to 17 today. At the same time, many countries have begun liberalizing their economies and developing their capital markets. Not just Ghana and Egypt, but African markets overall have easily outperformed the world averages last year and over the past three years. Moreover, the number of stock exchanges has jumped from ten to 18 in the past decade. The International business community and most multi-national corporations operating businesses in Africa have been reaping significant dividends from their investments and in many cases the rates of return have been higher than from those in other regions. Another very good reason to look to Africa is that investment, rather than charity, is more likely to lift Africa out of its troubles and poverty in the long term.

Disclosure: No Position