Egypt Is In Turmoil: Should You Invest Now?

The recent unrest in Egypt has drawn the attention of the entire world. A backlash against Mohamed Morsi, the nation's first democratically elected president, spurred a coup by the Egyptian military early this month. With the transitional government working to form a cabinet and restore order, the country is a potential powder keg as the Muslim Brotherhood and other Islamists find themselves under threat of arrest.

As you'd expect during times of trouble, the stock market in Egypt plunged during early June as protests gradually grew in force and the conflict began to escalate. Yet courageous investors bought into the market during those declines, and since the military has taken power, the Egyptian stock market has recovered almost to its pre-conflict level. As the new government fleshes itself out, is now the right time to invest in Egypt?

Image source: Wikimedia Commons.

Finding your way in
The first thing to realize about investing in Egypt is that it's not terribly easy. The most popular way for U.S. investors to invest in Egypt is the Market Vectors Egypt ETF , which owns more than two dozen different stocks in the Middle Eastern country. The reason: Most of the stocks you'll find inside that ETF aren't available on major exchanges within the U.S., making it very difficult for investors to buy the stocks directly. The ETF is primarily concentrated in financial and telecom stocks, which make up almost 75% of its investments, with the remaining quarter of the fund's assets invested in the energy and basic-materials sectors.

Still, most investors haven't seen the crisis as an opportunity to invest in Egypt, making it a potential contrarian opportunity. Most analysts have instead looked at the current Egyptian crisis as a potential problem for global trade. With the strategically placed Suez Canal and oil pipeline greatly facilitate trade between Europe and Asia, especially for energy products, unrest in Egypt could threaten shipping and lead to trade disruptions that in turn could create temporary price moves for important commodities.

Solving the economic problems
Most of the discussion of Egypt's problems have centered on political clashes. But underlying those conflicts is the basic fact that the nation's gross domestic product has been falling recently in inflation-adjusted terms, leading to massive unemployment that compares unfavorably even to the sky-high jobless rates we've seen in hard-hit areas of Europe. Moreover, outdated policies -- e.g., expensive fuel-price subsidies that keep the price of gasoline artificially low -- have sapped financial resources away from potentially more productive uses like skills-training and investment in higher-growth industries such as technology and manufacturing. Those impediments sent the value of the Egypt ETF's price down by half between its inception in early 2010 and the late 2011 unrest that led to the ouster of former President Hosni Mubarak and the eventual election of Morsi.

EGPT Total Return Price Chart
EGPT Total Return Price Chart

Egypt ETF Total Return Price data by YCharts.

Optimists now hope Egypt will be able to apply for assistance from the International Monetary Fund to help develop its economy. Unfortunately, without the extensive oil and gas reserves that so many of its neighbors benefit from, Egypt faces challenges that are unusual among its closest peers.

Hope for the future
For investors, though, the experience of investing in other countries following periods of civil strife and political upheaval should provide some solace. In Greece, demonstrations have continued under government austerity programs, but the stock market there is still up about 60% from about a year ago despite having given up ground lately. Spain, which also suffers from high unemployment, has climbed by about a third from year-ago levels.

There's no guarantee that Egypt will be able to match those gains, as a 50% rise in the Egyptian ETF during the first nine months of 2012 proved fleeting. But a lasting solution to the crisis there would make it clear in hindsight that now was the right time to invest in Egypt.

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