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Egypt Inflation Up: ETFs in Focus

Per the Central Bank of Egypt (CBE), Egypt’s core inflation increased to 31.95% in June, owing to continuously rising fuel and electricity prices compared with a reading of 30.57% in May. Core inflation excludes volatile items like food.


The country’s inflation has been on an upward trajectory since last November, when it floated its currency owing to the loan deal with the International Monetary Fund (IMF). Other prerequisites for the $12 billion loan were to hike taxes and reduce subsidies.


The Egyptian government also raised fuel prices by 50% towards the end of June 2017, in order to meet IMF’s loan terms. It also increased household electricity prices by more than 40%. These austerity measures are a part of a three-year reform program.


In order to tackle inflation woes, Egypt’s central bank hiked its key interest rate in early July by 200 basis points to 18.75%. Since the government floated its currency in November 2016, it has hiked interest rates by 700 basis points (read: Central Bank of Egypt Raises Rates: ETFs in Focus).


Egypt's deputy finance minister Mohamed Meait, sees interest rates as a temporary means to tackle inflation. He expects inflation to fall in early 2018 and therefore begin with interest rate cuts too. The central bank eyes a 13% inflation target by end of 2018.


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 $57 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 25.9%, 22.3% and 12.7% exposure, respectively (as of June 30, 2017). From an individual holding perspective, Commercial International Bank Egypt Sae, Global Telecom Holding Sae and Egyptian Financial Group-Hermes Holding are the top three allocations of the fund, with 8.96%, 7.84% and 6.99% exposure, respectively (as of June 30, 2017). The fund has returned 2.23% year to date but lost 28.58% in the last one year (as of July 10, 2017). EGPT currently has a Zacks ETF Rank #4 (Sell) 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 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 Africa but generate at least 50% of their revenues from the continent.


It has AUM of $70.4 million and charges 79 basis points in fees per year. It has a 10.74% allocation to Egypt (as of June 30, 2017). Financials, Materials and Consumer Discretionary are the top three sector allocations of the fund, with 32.5%, 22.6% and 12.8% exposure, respectively (as of June 30, 2017). From an individual holding perspective, Commercial International Bank Egypt Sae, Naspers Ltd and Centamin Plc are the top three allocations of the fund, with 8.21%, 7.89% and 4.18% exposure, respectively (as of June 30, 2017). The fund has returned 8.54% year to date and 4.17% in the last one year (as of July 10, 2017). AFK currently has a Zacks ETF Rank #3 with a Medium risk outlook (read: Recession Hits South Africa: Avoid this ETF).


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


 
Source: Yahoo Finance


Bottom Line


Therefore, it is evident that the broader Africa based ETF has performed significantly well compared with the Egypt ETF. However, given the high uncertainty around the inflation outlook and the path interest rates will take, we believe it is best to avoid the Egypt based ETF and steer clear from the broader Africa ETF.


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