To say this year has been eventful one for the Market Vectors Egypt ETF (NYSEArca: EGPT) would be an understatement. Political turmoil, dwindling foreign currency reserves and a double-digit unemployment rate were among the factors that sent EGPT tumbling earlier this year and to a July reverse split.
EGPT’s 1-for-4 reverse split went into effect on July 1. The artificial boost in price was followed by legitimate appreciation as EGPT proceeded to gain about 18 last month, easily making the fund the month’s best-performing emerging markets ETF. [July ETF Performance Report]
While Egypt is in immersed in a political situation that can be described as tenuous at best, EGPT may have caught another positive break Thursday when Egypt’s central bank pared interest rates by 50 basis points to 9.25%. The unexpected rate cut is the country’s first since 2009 and shows central bank there could use increased stability in the Egyptian pound to further lower rates in a bid to stimulate North Africa’s largest economy. [Pivotal Week Looming for Egypt ETF]
It usually takes a while for the full effects of rate cuts to play out, but lower borrowing costs could be a positive for the volatile EGPT. The ETF is dominated by financial services stocks, which control 42% of the fund’s weight. However, lower borrowing costs could be a boon for capital-intensive telecom and materials names, a combined 29% of the ETF’s sector weight.
Before becoming too enthused by news of the Egyptian rate cut, investors should consider the other side of the story. That is a subdued inflation outlook that is subdued because of slack economic growth. Egyptian growth could falter to 2% this year from 2.2% last year and at no time since the Arab Spring two years ago has the country posted economic growth in excess of 2.2%, report Mariam Fam and Alaa Shahine for Bloomberg.