Egyptian ETF Crumbles As Tunisian Protests Spread

by on January 19, 2011 | ETFs Mentioned:

The new year began with a great deal of promise for investors around the world; the economic situation in the U.S. was slowly improving, Europe was doing its best to contain its debt crisis, and the world’s major emerging markets continued to grow at an impressive clip. Yet underneath the surface, tensions were building in a number of smaller, poorer nations that have been forced to deal with the worst of the inflationary pressures some believe have their origins in Western central banke.

One particular area of the globe that has been impacted by these recent events is the Middle East, where food inflation has become a major issue, especially in the North African nation of Tunisia. The small country has erupted into a popular revolt which has ousted the long time leader of the country in favor of a democratic regime. While the leadership of the nation remains in doubt, one thing is for certain; the events of this ‘Jasmine Revoultion’ have inspired a number of youths in countries around the region to rethink their own lives and consider expelling corrupt dictatorships throughout the North Africa and Middle East region [read Emerging Market ETF Investing: Beyond The BRIC].

“The risk of a spill-over of Tunisia’s crisis to the rest of the Middle East and North Africa is not negligible,” Barclays Capital wrote in a report. “Unemployment rates in the region, notably among the youth, are some of the highest in the world, while inflation is running at elevated levels, and political freedoms remain generally constrained.” Barclays forecast “some re-pricing in countries where political stability is considered fragile.” Tensions have already begun to impact a number of nearby countries in the region where citizens are taking clues from the Tunisian model. Protests have sprung up in Algeria and in Egypt where the situation is growing especially tense.

Egypt has long been ruled by one of the most autocratic regimes in the region and some are beginning to believe that the overthrow in Tunisia may be the spark that the nation’s people needed in order to pursue a similar campaign. Several men in Egypt have attempted self-immolation in protest of the government– much like in Tunisia–and mass demonstrations have taken place in the country’s major cities. “Still, the best hope for the ‘Tunisia scenario’ to repeat itself in Egypt would likely come sometime after January 25th. After all, Mubarak is pushing 83 and reportedly ill, with First Lady Suzanne Mubarak said to be grooming their son Gamal for succession, writes Eric Trager in The Atlantic. “Opposition party leaders routinely call this possibility intolerable, and rumors regarding the army’s displeasure with Gamal could make his ascent a destabilizing time for Egypt.” This uncertain political scenario and an increasingly bold population could create a potential powder-keg scenario which could explode at any moment [also read Egypt ETF In Focus After 'Elections'].

As a result, investors are leaving the Arab nation in droves, pushing down markets across the board in the country. Credit Default Swaps (CDS) on Egyptian debt, which are designed to pay out if the nation is unable to pay foreign creditors, soared in recent weeks as the situation looks likely to accelerate considerably. It now costs investors roughly 300 basis points to ensure debt using a CDS, a roughly 60 basis point increase since the start of the year. The nation’s equity and forex markets were also hard hit; foreign investors were net sellers of close to $39 million worth of Egyptian pounds while equity markets sank precipitously on the growing fears over the situation’s impact on economic events in key sectors such as banking and tourism.

During trading after the MLK Jr Holiday, the Market Vectors Egypt Index Fund (EGPT) plummeted by 8.2% in the session, underscoring just how widespread the fears are over the brewing crisis in Egypt. “Overseas investors are reducing their positions because of the increased political risk stemming from what we saw in Tunisia,” said Ahmed Alseesi, head of sales trading for Middle East and North Africa institutions at Cairo-based Acumen Securities [also see Egypt ETF: A Wonder Of The ETF World].

Egypt ETF In Focus

EGPT tracks the Market Vectors Egypt Index, which provides 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 the country. The fund offers exposure to 27 companies in total with a heavy weighting going towards the financial sector, which makes up about 45% of total assets. Telecommunication firms, as well as materials and industrials all account for double-digit holdings as well. The fund offers exposure to a number of small and mid cap securities; large caps make up only a small percentage of the ETF’s holdings [see more on EGPT's holdings page].

The fund charges investors an expense ratio of 94 basis points and trades with relatively light volume, suggesting that investors should use caution when moving in or out of a position. The severe losses in light of the Tunisia crisis have pushed the fund down for the year but over the past 26 weeks EGPT has still managed to produce a gain of close to 10% to investors. Should the protests continue causing the region to destabilize further, it could lead to an even more widespread sell off. If however, the autocratic regime is able to quell the calls for change and maintain the status quo, look for investors to once again embrace the Egyptian economy [also read ETFs For The Next 11 Economies].

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Disclosure: No positions at time of writing.