Investors kept bidding up the market’s only Egypt-focused ETF today, even after the army's ouster of Egypt's president July 3 sparked violence, a reflection of hopes the Egyptian military might restore order to a society that has teetered on the verge of breakdown since the toppling of Hosni Mubarak's regime more than two years ago.
The army issued an ultimatum on Monday that it would intervene within 48 hours and impose its own solution if Egyptian President Mohammed Morsi didn’t mend rifts with an increasingly restive opposition. Morsi at first resisted the calls for his resignation, but was forced from power Wednesday. Morsi rejected what he called a “military coup,” just as the army pledged to quickly hold presidential elections. Clashes between the army and Morsi led to a least three deaths on Friday.
The Market Vectors Egypt ETF (EGPT) was up 2.6 percent on Friday. It may seem surprising that EGPT could be rising with the stakes so high, but even before the military coup, the ETF closed 4.32 percent higher on Wednesday; on Tuesday , it was the U.S. .ETF market's best performer, rising 5.8 percent.
At play this week are hopes the military could bring more stability to the biggest country in the Middle East. The army’s move recalls the historical role of providing stability that the military has long played in Egypt, though the prospect of a showdown with Morsi supporters in the future remains unsettling.
For now, the bottom line seems to be that Egypt, as the adage in foreign policy circles goes, isn’t so much a country with an army as an army with a country. So the market’s reaction to the turmoil there coming to a head with the army asserting its historical influence seems to reflect an appreciation among investors for the stabilizing role the army has played there.
“What you see there is a move to more stability,” said David Garff, whose Walnut Creek, Calif.-based firm Accuvest Investors markets equity asset-allocation plans using only single-country ETFs.
“Now at least you’re closer to knowing how this might go down, and there’s less uncertainty, which is bringing people back into the market,” Garff said before Morsi indicated he had no intention of stepping down.
Another reason markets may have been taking Egypt's problems in stride is that Egypt has lost influence in the region, according to Stratfor, the Austin-based geopolitical think tank. With that diminished influence comes a more measured reaction from outsiders as to what is going on there, and, more profoundly, just how much it matters in the end.
“As Egypt’s political system evolves, it is becoming clear that—with the exception of a few critical issues, including Gaza, the Suez Canal and the Egyptian military’s ability to secure both—Western and regional governments are viewing Egypt’s affinity for unrest with diminishing concern,” Stratfor said in one of its Geopolitical Diary research notes published Tuesday.
Still, trading volume in EGPT was more than 100,000 shares on Tuesday and at 170,000 on Wednesday — the latter about 10 times its average daily level in the past three months of about 17,000, according to data compiled by Bloomberg. Those data suggest that investors are not running scared from Egypt, but rather piling back in, and in a big way.
The ETF, which has lost half its value since its launch in February 2010, underwent a 1-for-4 reverse share split effective at the open on July that served to pump up its depressed share price four times. In other words, EGPT shares would have been up to around $10 a share Tuesday and to $10.50 a share on a pre-split basis.
Value Or Value Trap?
“I think the Egypt case is very interesting, but fundamentally it doesn’t look good,” Accuvest’s Garff said.
The negative factors—relative to other countries—Garff considers important include momentum, risk, return on equity and, not least, valuation, to name a few.
As an example, the price/earnings ratio of the MSCI Egypt Index is 22.9, compared with 15.9 for the MSCI All Country World Index, which excludes frontier markets.
Those data points tell the tale of an Egyptian market that was positively on fire after the ouster of Mubarak.
Between the beginning of last year and yesterday, EGPT is up 9.02 percent on an annualized basis, compared with 1.81 percent for the iShares MSCI Emerging Markets Index Fund (EEM), a widely followed yardstick for developing-world equities.
More recently, of course, equity markets around the world have been pulling back largely because of the Federal Reserve signaling the possibility of changing interest rates, but also because of unrest in developing countries, including Egypt, Turkey and Brazil.
While Garff may be inclined to view Egyptian equities with wariness, it doesn’t mean he’s right.
“It doesn’t mean it won’t go up,” he said about EGPT.
EGPT isn’t yet part of Accuvest’s universe of single-country ETFs eligible for its asset-allocation plans because Egypt doesn’t produce all 40 data points the firm requires to include a given fund in the mix.
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