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The case for investing in Egypt (EGPT)

Reporter Rudy Martin explains the easiest way to invest in Egypt and contemplates whether its the world's next investing wonder.
ETF Daily News | 29.05.2012
Stocks took a hit earlier in the week, and many emerging markets felt the pinch more than most. However, one of those developing markets in particular is faring surprisingly well right now.

If you’ve never considered an investment in Egypt, today I’d like to talk with you more about why this land that’s home to two of the world’s seven wonders is gearing up to become an investing wonder in its own right.

Egypt is what you’d call a frontier market, which I like to think of as a “pre-emerging” economy … even though it is home to what many consider to be the first great civilization in the world. However, along with pharaohs and pyramids, it might also be able to add “profits” to that list, and soon.

The Easiest Way to Invest in Egypt

In the first quarter of this year, Market Vectors Egypt Index ETF (NYSEARCA:EGPT) was ranked as one of the leading non-leveraged ETFs, as it rose nearly 30% during that time. And even as many other emerging- and frontier-market indices took a tumble recently, the Egypt ETF only lost about 2% when some other markets lost up to 30%.

In a rocky trading environment like the one we’re seeing right now, it’s unusual to see emerging- or frontier-market ETFs with such resilience. And that’s why I believe it’s time to start paying close attention to EGPT.

The fund consists of 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 stocks are mainly small- and micro-cap, and 20% are in communications services, with Orascom (OLTD on the London Exchange) being the largest telecom position.

While the ETF has been around for more than two years, it has less than $50 million in assets. Although it has not caught on across a broader investment base, I believe that could change in the very near future.

A New Kind of Revolution Is in Store

It’s been more than a year since the revolution that led to the unseating of former Egyptian President Hosni Mubarak, and millions of Egyptians voted in their first free presidential elections this week with 13 candidates to choose from.

The uprising was said to have cost about $30 billion. This has put a damper on economic growth for the past several quarters. Plus, the impact of high international food and fuel prices was exacerbated in 2011 by the depreciation of the Egyptian pound owing to political instability.

Political concerns are likely to be less of a drag on the economy going forward. But while growth for the coming year is forecast at a modest 1%, a return to political stability would only serve to enhance that figure.

Speaking of Egyptian politics, the front-runner in this week’s presidential race from the beginning was Amr Moussa, a diplomat who served as Secretary-General of the Arab League from 2001 until 2011. Prior to that, he served 10 years as Egypt’s minister of foreign affairs.

He has ambitious plans for grand projects, such as transforming the Suez Canal into an integrated industrial, agricultural, commercial, maritime and free-trade-zone development. That way, it would become a magnet for investments.

Moussa has similar development plans for Sinai, west of the Nile, and the northwest coast to restore huge wheat production after clearing the minefields in that area, which is under way right now.

Could Egypt Be the World’s Next Investing Wonder?

The hope of any new government is that Egyptian, Arab and foreign investments would again flow to concrete, feasible and viable projects. Ideas to initiate a national program for small- and medium-sized business loans to encourage entrepreneurs are also being floated.

And in a bid for the agricultural vote, there is talk of establishing a new bank to finance agricultural production and reconsider the prices of crops to help farmers.

In addition, the economic situation is improving in Egypt.

On an annualized basis, GDP grew by 5.2% between January and March 2012 compared to the same period in 2011, when Egypt’s uprising erupted.

The economy’s private consumption appears fairly resilient, and government consumption will be buoyed by an increase in current spending (particularly on subsidies), public-sector wages and interest payments, further supporting private demand.

And this new view is starting to be recognized by others.

The World Bank ranks Egypt as a top reformer, while the European Union recently ranked Egypt as the best country in the Arab world in which to do business.

And let’s not forget that Egypt has the scale to be successful.

It’s got a domestic market of 85 million people, which is expected to grow to 100 million by 2025. It also has a stable currency, sound macroeconomic policies and preferential market access to the United States, the European Union, the Arab countries, and a large number of countries in sub-Saharan Africa with growing economies of their own.

It’s got a thriving financial market, too. The Cairo and Alexandria Stock Exchange (CASE) is the second-largest on the continent, after Johannesburg.

My take on it is that it’s just a matter of time before investors see the value in investing in Egypt, and it could pay to get in ahead of this trend.