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 is also a member of Goldman Sachs' Next Eleven (N-11) economies that may have as much potential as countries in the BRIC region to overtake the G-20 nations.
In this article, we will take a look at Egypt's economy and how international investors can build exposure to their diversified portfolios.
The Egyptian Economy
Egypt's economy is one of the most developed countries in the Middle East/African region, with a gross domestic product (GDP) of approximately $303 billion in 2019 and approximately $3,008 per capita in 2019. Egypt, like many larger countries, has an economy that is dominated by the service and industrial sectors; at the same time, it is also known for its agricultural sector, which is a significant source of employment.
Egypt's stock exchange is also one of the most developed in the Middle East/African region, with more than 600 listed companies and $6 billion in annual turnover. While the markets were shut down for a period of time after the fall of Hosni Mubarak in February 2011, they re-opened, and the economy began to show signs of recovery by late 2012.
Investing in Egypt With ETFs
The easiest way to invest in Egypt is by using exchange-traded funds (ETFs), which offer instant diversification in a single U.S.-traded security. The most popular ETF for U.S. investors is the VanEck Vectors Egypt Index ETF (NYSE: EGPT), which has approximately $20.2 million under management and a net expense ratio of 0.96%, as of February 2021.
Those looking for more direct play may instead want to consider American Depository Receipts (ADRs), which are U.S.-traded securities that track stocks listed on Egyptian stock exchange. The most popular ADRs are Commercial International Bank S.A.E. ADR (CIBEY), Orascom Construction Industries S.A.E. ADR (ORSCY), and Ghabbour Auto S.A.E. ADR (GBAXY).
Risks of Investing in Egypt
While Egypt may be one of the largest economies in the Middle East/African region, its markets entail significant risks. They include the following:
Political and Geographical Risk
Egypt had undergone a major political change after the overthrow of Hosni Mubarak in February 2011. There continues to be ongoing political turmoil, as the country remains divided by religion.
Lack of Diversification
Investors looking to take broad positions in Egyptian equities may find issue with the lack of diversification offered by the markets. There are only four companies that account for a large portion of the country's economy, while the financial industry has also been overly represented.
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. Fortunately, these risks can be diversified away to some extent by incorporating stocks into an otherwise diversified investment portfolio.