Eye on Egypt ETF Following 'Elections'

Nov.29.10 | About: VanEck Vectors (EGPT)

One of the world’s largest exercises in democracy took place over the weekend, as voters headed to the polls in Egypt for a chaotic election that highlighted rising uncertainty and conflict in one of Africa’s largest economies. The National Democratic Party of president Hosni Mubarak, who has ruled since 1981, was widely expected to strengthen its grip on power, a development that could pave the way for a transition of power from the 82-year old Mubarak to a still-unnamed successor at some point in the next two years.

But the real story from the weekend elections were the widespread reports of violence, voter fraud, and crackdowns on opposition party candidates. Egypt ignored calls from the U.S. and other countries to allow international poll monitors, and some watchdog agencies reported that voting irregularities were numerous. “The authorities promised that Egyptian civil society could monitor the elections without the need for international observers,” said Joe Stork, deputy director of Human Rights Watch’s Middle East division. “Unfortunately the repeated exclusion of opposition representatives and independent monitors from polling stations, along with reports of violence and fraud suggest that citizens were not able to partake in free elections.”

More troubling were reports that some 1,300 members of the Muslim Brotherhood party, the primary rival to the NDP, were arrested in the weeks leading up to the elections. In addition, several web sites, including both pages operated by the Muslim Brotherhood and an independent site dedicated to aggregating allegations of fraud, were shut down. “The government crackdown, one of the most aggressive in years, underscored the degree to which Egypt has reversed the modest steps it took toward democratization ahead of parliamentary and presidential elections in 2005, at the height of the Bush administration’s campaign to push democracy in the Mideast,” writes Charles Levinson.

Since winning nearly 20% of parliament in 2005 elections, the Muslim Brotherhood has faced increasingly stiff pressures from the current administration. The anti-democratic measures culminated on Sunday with elections that almost no Egyptians believed to be legitimate [also read Seven Most Corrupt Country ETFs].

Egypt Economy: Uncertain Future

Egypt is a land of tremendous economic potential but faces considerable threats to sustainable expansion as well. The country is home to one of the largest and youngest populations in the world, two key ingredients for a thriving economy. And its strategically important locations–as much as 8% of the world’s shipping traffic passes through the Suez Canal–has positioned the country as a hub of global trade. Egypt is also unique from its Middle East neighbors in that the economy doesn’t rely exclusively on the oil sector; the energy industry accounts for only about 15% of GDP [also see our Emerging Markets ETF Center].

The country is included in the “Next Eleven” bloc of countries that many economists believe will someday rival the G-7 in economic importance [see ETFs To Play The N-11 Countries]. But recent events highlight the tremendous hurdles to sustained economic growth in the region. Many analysts saw the aggressive election season crackdowns on opposition parties as an indication that the National Democratic Party is losing its grip on the country, potentially setting the stage for a violent and destabilizing power struggle. Beyond the political uncertainty, the Egyptian economy faces numerous challenges. A decades-long battle with inflation is still a major concern; the year-over-year reading for October came in above 11% according to the state statistics agency. And much of the country still lives in poverty, with per capital GDP of only about $6,000.

Egypt ETF In Focus

For investors looking for a way to play the Egyptian economy–either through a long or short positions–one of the best “pure play” options may be the Market Vectors Egypt ETF (NYSEARCA:EGPT). This fund seeks to replicate the Market Vectors Egypt Index, a benchmark that consists of companies that are either listed on an exchange in Egypt or that generate the majority of their revenues in Egypt. The Egypt ETF consists of about 25 individual holdings, and like many funds in the Emerging Markets ETFdb Category, allocates a big chunk of holdings (about 45%) to the country’s financial sector [see complete sector and market cap breakdown].

Although 2010 has been a stellar year for many emerging markets, political uncertainty and concerns over runaway inflation have held the Egypt ETF in check; the fund is down slightly since its inception in February, but has rallied in recent months [see more fundamentals of EGPT here].

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Disclosure: No positions at time of writing.

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