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Central Bank of Egypt Raises Rates: ETFs in Focus

Zacks Equity Research

Egypt’s central bank raised its interest rates on May 21, 2017 to curb the inflation problem faced by the country. Egypt’s consumer prices rose 31.5% year over year in April 2017, the highest since June 1986. On a sequential basis, it rose from 30.9% in March 2017. The rise in inflation is mainly due to the recent surge in cost of production, after the central bank removed currency controls in November.


Contrary to popular belief, the overnight deposit rate was raised by 200 basis points to 16.75% and the overnight lending rate was increased to 17.75%. As per a Bloomberg survey, six of seven economists had predicted a steady interest rate in the Monetary Policy meeting on May 21, 2017. This is the second rate hike in over six months, when the Monetary Policy Committee (MPC) raised interest rates by 300 basis points in November 2016. Moreover, as the central bank removed its peg to the U.S. dollar in November 2016, it has lost almost half of its value.


Central Bank of Egypt has the backing of the International Monetary Fund (IMF) in its fight against inflation. The November 2016 decisions by the bank helped raise a $12 billion three-year loan from the IMF.


In order to bring stability to the economy and fight ever-increasing prices, real interest rates have to be looked at. This is the difference between the inflation rate and the deposit rate, which is currently negative.


Per Bloomberg, the Egyptian government expects inflation to be down to 23% next year and to 9.7% the following year.


In the current scenario, let us discuss the most popular ETFs providing exposure to Egyptian equities.


VanEck Vectors Egypt Index ETF EGPT


This fund seeks to provide exposure to the emerging market of Egypt, serving as a pure play on the economy.


It has AUM of $56.4 million and is a relatively expensive bet as it charges a fee of 1.01% a year. From a sector look, Financials, Real Estate, and Telecommunication Services are the top three sector allocations of the fund, with 25.8%, 22.0%, and 13.1% exposure, respectively (as of April 30, 2017). From an individual holding perspective, Commercial International Bank Egypt Sae, Global Telecom Holding Sae, and Egypt Kuwait Holding Co Sae are the top three allocations of the fund, with 9.30%, 8.02%, and 6.41% exposure, respectively (as of April 30, 2017). The fund returned 6.14% in the year-to-date time frame but lost 24.47% in the past one year (as of May 21, 2017). EGPT currently has a Zacks ETF Rank #3 (Hold) with a High risk outlook.


Let us now compare the performance of this ETF to a broad-based Africa ETF (see all Africa-Middle East Equity ETFs here).


VanEck Vectors Africa Index ETF AFK


This fund has an almost 60% exposure to African nations. It covers economies like South Africa, Egypt, Nigeria, Morocco, Kenya, and Mauritius. It also invests in offshore listings of companies incorporated outside of Africa but who generate at least 50% of their revenues from the continent (read: Avoid South Africa ETF Amid Political Uncertainty).


It has AUM of $70.5 million and charges 79 basis points in fees per year. It has a 10.49% allocation to Egypt (as of April 30, 2017). Financials, Materials, and Consumer Discretionary are the top three sector allocations of the fund, with 30.8%, 23.6%, and 12.3% exposure, respectively (as of April 30, 2017). From an individual holding perspective, Naspers Ltd, Commercial International Bank Egypt Sae, and Egypt Tullow Oil Plc are the top three allocations of the fund, with 8.49%, 8.00%, and 5.17% exposure, respectively (as of April 30, 2017). The fund returned 7.09% in the past one year and 8.39% in the year-to-date time frame (as of May 21, 2017). AFK currently has a Zacks ETF Rank #3 with a Medium risk outlook.


Below is a chart comparing the year-to-date performance of the two funds.


 
Source: Yahoo Finance


To Conclude


Though hiking interest rates is the general path followed to curb inflation threats, analysts predict that Egypt’s inflation problem is not demand driven, but mainly caused by higher input costs. Therefore, the increase in interest rates to solve the problem is being questioned. We will have to wait and see how Egypt handles the ever surging consumer price problem with IMF’s assistance. Hence, we believe it is best to remain on the sidelines for now.


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VANECK-EGYPT (EGPT): ETF Research Reports
 
VANECK-AFRICA (AFK): ETF Research Reports
 
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