The sudden and bizarre detour taken by the Egypt ETF over the last month seemed headed back towards normalcy this morning, as the Egyptian Stock Market was set to reopen for trading for the first time in more than a month. But in a last minute decision government officials delayed the reopening once again until March 6, this time in order to “allow investors to profit from the government’s support to guarantee stability in the bourse.”
The Market Vectors Egypt Index ETF (EGPT) has seen a surge in interest in recent weeks as investors have gravitated towards the tumultuous Middle East in search of short term opportunities. Unfortunately for the fund’s issuer, a prolonged closure of the country’s stock market has prevented new creations of the fund. Egypt’s benchmark stock index fell by 6.1% on January 26 and another 10.5% on January 27 as protests erupted across the country. The Egyptian stock market has been closed ever since, and the re-opening of the exchange has been delayed several times as officials scrambled to devise a system for ensuring orderly trading. On January 31, Van Eck announced that it was suspending creations of EGPT, citing firm policy of “suspending creation orders when the underlying market is closed for an extended period thereby helping to prevent the costs of creation activity to be borne by existing shareholders.” Van Eck said at the time that it expects EGPT to resume normal operations once the Egyptian Stock Exchange reopens.
That re-opening has been postponed several times over the last month, including the recent delay from Tuesday to Sunday. After weekend meetings with the head of the bourse, the cabinet initially released a statement indicating that trading would resume on Tuesday with safeguards in place to ensure an orderly return to operations. “The Financial Supervising Authority of Egypt and the Egyptian Exchange implemented some temporary measures that should be used to lower the volatility in our markets and these measures are just temporary,” Mohamed Farid Saleh, Vice Chairman of the Egyptian Exchange, told CNBC on Monday. “In addition to that, we requested some extra disclosure from companies related to their performance and potential implications related to what has been happening recently in Egypt.”
According to reports from state news agency MENA, trading will be suspended for 30 minutes if the benchmark index declines by 3% and for the remainder of the session if it falls by 6% [see Middle East ETFs Under Pressure].
Egypt ETF: Bye Bye, Premium
EGPT has been in a bit of a unique situation because of the cash creation mechanism the fund features. Unable to deploy capital received from Authorized Participants before trading in the Egyptian Stock Market ceased, EGPT has been stuck with a big chunk of cash for the last month or so; total cash held by the fund was about $9.5 million, or 39.4% of total assets. Despite the big cash position, EGPT has been trading at a significant premium to its net asset value; the fund closed Monday at a premium of 13.2% after losing more than 5% of its value during the week’s first session. Since creations were suspended in late January, that premium has ranged from 10.1% to 20.4%; the fund lost 0.6% in February, but exhibited considerable volatility during the month [see Behind The Egypt ETF's Wacky Premium].
That disconnect reflected sentiment among investors that the value of the underlying securities had increased since trading on the Egyptian exchange was halted late in January. EGPT has essentially been acting as a price discovery mechanism in recent weeks while the underlying holdings of the fund have been frozen. Shares of some of the stocks that make up the Egypt ETF are traded in Canada and London, but values for the majority of component companies had not been published in more than a month.
The Egyptian pound has rallied slightly against the greenback following a central bank intervention in February, and the cost of insuring the country’s debt has also declined. According to Markit, the cost to insure $10 million of Egyptian debt against default fell to $375,000 on Monday, down from a peak of $433,000 in late January.
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Disclosure: No positions at time of writing.