The Market Vectors Egypt Index ETF (NYSEArca: EGPT) will be one to watch Tuesday after index provider Russell Investments said it is demoting North Africa’s largest economy to frontier markets status from emerging markets classification.
Russell Investments made the announcement in its Russell Indexes 2014 Country Classification. The index provider will move Egypt to frontier status effective June 27, 2014.
Egypt has been on Russell’s so-called glide path to be moved to frontier from emerging classification since 2012. Under Russell’s methodology, a country that scores higher or lower than its peers for three consecutive years is eligible to be reclassified, according to the firm.
Egypt’s country risk as measured by the Economist Intelligence Unit Country Risk Service (EIU) has risen to 62 this year from 60 in 2012, well above the score of 41 that is the emerging markets median and the median score of 50 for frontier markets, according data from Russell.
News of the Russell demotion of Egypt could impact EGPT, which despite a 5.2% loss Monday is still higher by 20.3% this year. That performance makes EGPT easily one of this year’s top-performing single-country emerging markets ETFs. [Opportunities With Emerging Markets ETFs]
Egyptian stocks and EGPT have surged amid a sustainable run of geopolitical stability in a country that has known precious little of that scenario since the Arab Spring of 2011. Egypt’s army-backed government is currently in a transitional phase, with elections set to take place later this year. [Stimulus Package Could Lift Egypt ETF]
Russell notes that the risks associated with investing in Egypt have chased investors from the market to Qatar and the United Arab Emirates, two countries that will are being promoted to emerging markets status from the frontier classification. Qatar and UAE are seen as the primary drivers of upside since early 2013 for ETFs such as the iShares MSCI Frontier 100 ETF (NYSEArca: FM) and the WisdomTree Middle East Dividend Fund (NasdaqGM: GULF). [Tee Off With GULF]
Although EGPT and the other ETFs with significant Egypt exposure do not benchmark to Russell indices, at least two factors are worth noting. First, MSCI also has Egypt on watch for a possible emerging-to-frontier demotion.
Second, Russell was the first major index provider to demote Greece to emerging from developed market status last year. MSCI and S&P Dow Jones Indices would later follow suit. [Another Emerging Markets Demotion for Greece]
Market Vectors Egypt ETF
