For EGPT, Bright Days Could Lie Ahead

 | May 16, 2012 | 10:30 AM EDT
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When Egypt drove Hosni Mubarak out of power in early 2011, many cheered the change as an opportunity for a horribly mismanaged economy to embrace the modern world and finally begin to thrive as an open market. Of course, that has proven to be much easier said than done. Egypt has been free of Mubarak for more than a year, but it has struggled mightily to transition from a dictatorship to a free, open economy.

Those who identified the Market Vectors Egypt ETF (EGPT) as a promising opportunity have not been rewarded so far -- the fund has lost about 11% over the last year as the country has struggled to get on track. Corruption and violence have been major hurdles that have been tough to overcome, and the lack of a constitution has been a key uncertainty for investors.

Recently, Egypt has shown some signs of moving forward, and that could be great news for EGPT. A recently released draft budget predicts economic expansion in the range of 4% to 4.5% for the fiscal year starting up in July, and the budget deficit is expected to drop sharply. There are also some positive signs that the country is taking steps to remove some of the instability that has plagued stock markets recently. For one thing, food subsidies are increasing next year, which should help to pacify many of the protesters who have repeatedly clashed with temporary authorities since Mubarak's departure.

The big test for Egypt -- and for EGPT -- will come next week when the country holds presidential elections. If the process runs smoothly, it could mark a major turning point toward a modern country (and a modern economy) that could finally begin to realize its potential. Polls indicate that the economy is the major issue by a wide margin among Egyptians -- an early but positive indication that upcoming elections may yield a president focused on growing the Egyptian market and addressing the challenges that have prevented a unique, resource-rich economy from thriving for the past several decades.

EGPT has been one of the few bright spots in the equity ETF universe over the past four weeks. The fund is up close to 6% over a period that has seen big losses for most stock-based ETFs. Egypt's equity market recently hit a seven-week high, though prices have pulled back in the last couple of days amidst lingering uncertainty. Given the numerous ups and downs that Egypt has seen over the past year, EGPT is certainly a risky play. If elections are marred by violence or allegations of fraud, it could signal another run around what is becoming a vicious circle.

But there's another side to that coin, as well. If elections proceed smoothly and Egypt takes a big step down the path to democracy, it could set off a wave of interest from international investors. EGPT is a risky bet, but I believe it's worth taking a chance on the fund right now. If upcoming elections run smoothly and the new administration is able to get to work establishing a constitution and restoring Egypt as one of the leading economies of North Africa, EGPT should proceed to outperform among emerging-market ETFs.

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