Egypt ETF (EGPT): Further To Fall?

One of the biggest stories in the market so far this year is undoubtedly the political revolutions that have been sweeping across the Middle East and bringing great change to the region. The movement, which began late last year, has already seen four leaders ousted across the region including in the Arab World’s most populous nation, Egypt. While there was jubilation after the end of Mubarak’s nearly 30 year rule, the path towards a sustainable democracy has been rocky to say the least. The military junta currently ruling the nation has maintained an iron fist over the country and a move towards truly free elections seems uncertain.

Since many Egyptians are less than willing to trade one military dictatorship for another, many citizens in the country have grown uneasy with the slow shift in the political process. These factors have led to widespread, and often times deadly, protests across the country, especially in the capital of Cairo. These have escalated in recent days with the large crowds demanding an immediate end to the military rule and a shift towards a civilian caretaker government. However, the junta remains steadfast in its dominance over the nation, taking violent actions against the protestors and using repressive tactics such as torture, media crackdowns, and military trials for civilians in order to keep some semblance of order in the region (see Hungarian Crisis Crushes The Austria ETF).

Unsurprisingly, investors in the area have been decimated by not only the political turmoil earlier in the year but the quickly spreading protests more recently. Thanks to this, the main way to invest in the country via ETFs, the Market Vectors Egypt Index ETF (EGPT), has been rocked in year-to-date terms. In fact, the product has lost close to 50% since the start of the year including a nearly 16.5% slump in the past month alone.

This terrible performance puts EGPT in a position to be one of the worst performers on the year in terms of unleveraged products, and given the lack of progress in the country and the rapidly declining political situation, it looks unlikely that this trend will be reversed anytime soon. "We passed the support point, so the only thing that will stop further declines in the market is fixing the political situation in the country," said Khaled Naga, a senior broker with Mega Investments. "We have to wait and see what happens."

The portfolio structure also doesn’t help investors in this Egyptian ETF as the fund’s holdings are very concentrated. EGPT devotes nearly 40% of its assets to the often volatile financial sector while large caps make up less than 10% of total assets. Instead, mid caps make up a small majority while small cap securities take up another 40%. This results in a very risk heavy portfolio to begin with and when investors add on the incredible political threats, EGPT becomes a very high volatile product indeed (read Three All-Star Leveraged ETFs).

Whether Egypt can turn things around remains to be seen, but obviously if recent history is any guide, it doesn’t look good for this youthful country. As a result, investors may want to consider EGPT as either a short play or as a volatile choice for traders; long term investing certainly seems unwise at this juncture. With that being said, if Egypt can ever manage to get its act together, EGPT could be due for a surge in the near future. Just be prepared for a batch of extreme volatility and for political developments, and not stock fundamentals, to drive prices going forward.

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VanEck Egypt Index ETF (AMEX:EGPT)
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From Nov 2024 to Dec 2024