Emerging markets ETFs, broadly speaking, have rebounded nicely over the past three months. In that time, the Vanguard FTSE Emerging Markets ETF (VWO) , the largest emerging markets ETF by assets, is up 7%. The largest China and South Korea are higher by an average of 15.2%.
Those performances lag the 17.7% surge notched by the Market Vectors Egypt ETF (EGPT) . To be fair, comparisons of Egypt against other developing markets are not always of the apples-to-apples variety. While plenty of emerging markets can be considered somewhat politically volatile, Egypt ups that ante. North Africa’s largest economy has undergone two regime changes in the past two and a half years. [Violence Sends Egypt ETF Tumbling]
The lack of political stability combined with a double-digit unemployment rate (youth unemployment is more than double the national average) and a weakening external reserves position has Egypt vulnerable to demotion to frontier markets status. Those factors among others, prompted substantial declines in EGPT earlier this year and those declines led to a 1-for-4 reverse split for the ETF in early July. [Market Vectors to Reverse Split 7 ETFs]
Since mid-July, however, EGPT has surged 17.7%. Egypt’s benchmark EGX 30 Index recently touched its highest levels since the early 2011 overthrow of Hosni Mubarak and is up 26% since the military removed President Mohamed Mursi from power.
A more stable political environment in Egypt is bolstering stocks and stoking hopes for increased economic growth, reports Tamim Elyan for Bloomberg. The economy may grow 2.1 percent this year and 2.9 percent in 2014, Bloomberg reported.
Increased political stability is essential to decreasing Egyptian equity market volatility and luring foreign investors to the market. While EGPT has outpaced the iShares China Large-Cap ETF (FXI) by 340 basis points over the past 90 days, the risk-adjusted returns favor FXI because t has been 700 basis points less volatile than FXI.
In favor of EGPT are valuation and a dividend yield that may come as a surprise to some investors. With a P/E ratio 7.77 and a price-to-book ratio of 0.97 at the end of the third quarter and a 30-day SEC yield of almost 8.1% as of October 11, EGPT is much cheaper with a far higher dividend yield than the broader emerging markets universe.
Market Vectors Emerging Markets ETF