Major Trouble Ahead For The Egypt ETF?

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August 19, 2013 5:23pm NYSE:EGPT NYSE:EWZ

EgyptDespite an incredible amount of turmoil this year, Egypt investments haven’t really panned out that badly. In fact, the main ETF tracking the nation, the Market Vectors Egypt Index ETF (NYSEARCA:EGPT) is only down about

15% on the year.

True, this isn’t a great performance, especially when compared to a number of developed nations, but it is far better than a number of developing countries and their ETFs so far this year. Countries like China, as represented by (FXI), or Russia, as represented by (RSX), have lost roughly the same amount on the year, while Brazil (EWZ) has actually underperformed Egypt by a pretty wide margin (see 3 Emerging Market ETFs to Limit BRIC Exposure).

These kinds of performance suggest that investors have been taking the volatile situation in Egypt pretty lightly, and have only sold off the securities in the nation as much as any other emerging market. Recent trends, however, could suggest that this benevolent attitude towards Egyptian stocks may be ending, and that risks may finally start being priced into the country’s only ETF.

What Happened?

EGPT was down about 3% in Wednesday trading on volume that was about two times normal. Thanks to this move, EGPT is now underperforming the broad emerging market ETFs over the past month, and the reason for the slump may signal that a further divergence could be at hand in the space too.

This is because the political situation is deteriorating even further in Egypt with worries seemingly growing by the day. Levels of violence are now escalating across the country and a state of emergency has been declared across the nation.

Just recently, hundreds were killed and thousands injured as forces sought to disperse opposition camps that were in favor of recently removed president Mohammed Morsi. And with the unrest spreading, death tolls are expected to rise as more camps are broken up, drawing condemnation from both the U.S. and the UN.

If that wasn’t enough, the widespread violence has also led to the resignation of the country’s interim Vice President Mohamed ElBaradei, who abruptly removed himself from his post. “It has become difficult for me to continue bearing responsibility for decisions that I do not agree with and whose consequences I fear,” said the now former Interim VP. “I cannot bear the responsibility for one drop of blood.”

The departure of the Interim VP, the condemnation by both the U.S. and the UN, as well as the declaration of the state of emergency, are combining to paint a very ugly picture for Egypt in the near term. Should the crackdown continue like this, the country may very well be on the path to civil war, suggesting that Egypt isn’t on a sustainable course by a long-shot (instead see 3 Emerging Market ETFs Still Going Strong).

Market Impact

Obviously this confluence of terrible events makes an investment in Egypt pretty dicey for the time being. While it is true that the country has fought through issues before, you could argue that concerns have reached a new level lately.

Prices of the best barometer we have for sentiment on the country, EGPT, were down sharply in Wednesday trading and there is widespread speculation that the worst of the current crisis is not over. Many had hoped that the country would be able to persevere and that the economy would grow after the ousting of Morsi—who presided over a very low growth environment—but this is clearly not going to be the case in the short term.

Bottom Line

More volatility seems ahead for the country, and turmoil could seemingly come around any corner, so the nation might still be one to avoid. For this reason, we are maintaining our Zacks ETF Rank of 4 (Sell) on this fund, and are looking for it to underperform peers in the future as well (see the full list of Top Ranked ETFs).

While it is true that EGPT has held up pretty well so far this year—and has actually outperformed markets like Brazil even with the coup/revolution in Egypt—a new leg downwards could be at hand soon enough. And given how little EGPT has lost so far this year, one has to believe that some significant pain could be ahead for investors in this ETF, unless the situation gets under control very soon in Egypt.

This article is brought to you courtesy of Eric Dutram.

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