A Guide to Investing in Egypt
Investing in a Key Middle Eastern/African Emerging Market
Egypt may be best known for its impressive pyramids and colorful history, but the heavily populated Middle Eastern/African country is also popular among investors. The country is widely considered to be a major frontier market, while it's also a member of Goldman Sachs' Next Eleven (N-11) economies that offer BRIC-like potential to overtake the G20 nations.
In this article, we will take a look at Egypt's economy and how international investors can build exposure into their diversified portfolios.
The Egyptian Economy
Egypt's economy is one of the most developed in the Middle East/Africa, with a gross domestic product (GDP) of $307 billion in 2015 and $11,194 in GDP per capita in 2015. Like many larger countries, the economy is dominated by the service sector (47%) and industrial sector (24%), but it's also known for its agricultural sector (29%) that provides significant employment.
Egypt's stock exchange is also one of the most developed in the Middle East/Africa with more than 600 companies listed and $6 billion in annual turnover. While the markets were shut down for an extended period after the fall of Hosni Mubarak in February of 2011, they have since re-opened, and the economy has begun to show signs of a recovery by late 2012.
Investing in Egypt with ETFs
The easiest way to invest in Egypt is using exchange-traded funds (ETFs), which offer instant diversification in a single U.S.-traded security. Those looking for a more direct play may also want to consider American Depository Receipts (ADRs), which are U.S.-traded securities that track stocks listed on the Egyptian Stock Exchange.
The most popular ETF for U.S. investors is the Market Vectors Egypt Index ETF (NYSE: EGPT), which has approximately $50 million under management and a net expense ratio of 0.94%, as of November 2012. Investors should be aware that the fund is approximately 44.5% weighted in financials, which means that it may be more sensitive to that industry's changes.
Popular Egyptian ADRs include:
- Commercial International Bank (CIBEY)
- Orascom Construction (ORSCY)
- GB Auto SAE (GBAXY)
Benefits & Risks of Investing in Egypt
Egypt may be one of the largest economies in the Middle East/Africa region, but the market entails significant political risk and other risks. Investors should carefully consider these risks before investing in Egyptian ETFs or ADRs, especially during periods of an uprising or political turmoil in nearby countries. The good news is that these risks can be diversified away to some extent by incorporating the stocks into an otherwise diversified investment portfolio.
Benefits of investing in Egypt include:
- Major Middle Eastern/African Economy. Investors looking for exposure to the Middle East and Africa will need to build in exposure to Egypt, as it's one of the largest countries in the region both by population and economy.
- Key Emerging Market Economy. Egypt is widely considered to be a major emerging market economy and is a key member of Goldman Sachs' Next Eleven (N-11) emerging market economies with BRIC-like potential to disrupt the G20.
Risks of investing in Egypt include:
- Political and Geographical Risk. Egypt recently underwent a major political change after Hosni Mubarak was overthrown in February of 2011, while there is ongoing political turmoil, as the country remains divided by religion.
- Lack of Diversification. Investors looking to take broad positions in Egyptian equities may find a lack of diversification with three companies accounting for a large portion of the economy, while the financial industry is also overly represented.
Key Points to Remember
- Egypt's economy is one of the largest and most developed in the Middle East/Africa region, making it attractive to many international investors.
- The easiest way to invest in Egypt is using ETFs or ADRs, which offer diversification (in the ETF's case) and access via U.S. stock exchanges.
- There are many risks that investors should consider before investing in Egypt, including the political risks and lack of economic diversification when it comes to public stocks.