A Forgotten Rally For This ETF

Either forgotten or ignored. Maybe both, but the fact of the matter is the Market Vectors Egypt ETF EGPT is up more than 12 percent over the past month. That puts the lone exchange traded fund tracking North Africa's largest economy slightly ahead of the MSCI Emerging Markets Index over that period and well ahead of the largest frontier markets ETF.

Interestingly, some of the recent surge in EGPT and Egyptian equities was accrued after the country devalued its currency, the pound.

“On 14 March, the central bank devalued the currency by 14% against the US dollar and said it would adopt a more flexible exchange-rate policy. The CBE supported the devaluation by auctioning USD1.5bn to help importers two days later, and hiked its main policy rates on Thursday by 150 basis points. These decisions reflect the pressures on the currency from a widening current account deficit, insufficient capital inflows and low levels of international reserves, which are less than three months of current external payments,” said Fitch Ratings in a recent note. 

Economists widely view the pound devaluation as a good move. Reportedly, Egypt's banking sector feels the same way, which is notable because financial services stock account for over half of EGPT's weight and Egypt's banks have recently been strained.

Weakness in Egypt's banking sector could have another impact: Egypt, in the eyes of some global investors, should be in line for possible demotion to frontier market status, a classification that other index providers have already slapped on Africa's third-largest economy. However, it should be noted that MSCI does not currently have Egypt on its list for possible demotion to frontier status.

“Two initiatives in the banking sector may help. Two state-owned banks are now offering foreign investors options on treasury bills with exchange-rate hedging. These banks are also offering 15% on three-year certificates of deposit for domestic investors who buy them within 60 days in exchange for foreign currency. If constraints on the supply of foreign exchange persist around current levels, Egypt could turn to the IMF. Fitch believes an IMF programme is within reach if required by the authorities,” adds Fitch.

Last week, two of Egypt's largest banks said they will issue three-year pound-denominated investment certificates with yields of 15 percent to lure fresh foreign investment. Those products will be made available to retail investors.