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Talking Points: April/May 2011

What Morningstar's analysts are hearing about investments in Egypt.

Morningstar Analysts, 04/11/2011

This article first appeared in the April/May 2011 issue of Morningstar Advisor magazine. Get your free subscription here. 

What Morningstar's analysts are hearing about investments in Egypt.

The Issues
Egypt's stock market, which closed on Jan. 27 amid political unrest, remained shut in early March, weeks after President Hosni Mubarak resigned. Revolts in Yemen, Jordan, Libya, and Bahrain have followed. While captivating, Egypt's turmoil won't directly affect U.S. fund investors much. Heightened instability in the region, however, could have indirect effects.

Most mutual funds have tiny Egypt exposure. Only 11 U.S.-based funds had 3% or more invested in Egyptian stocks, and they're often narrowly focused, such as T. Rowe Price Africa & Middle East TRAMX, Harding Loevner Frontier Emerging Markets HLMOX, and Templeton Frontier Markets TFMAX. Some exchange-traded funds, such as Market Vectors Egypt Index ETF EGPT and Market Vectors Africa Index ETF AFK, have larger stakes but few assets. Bond-fund exposure to Egypt is more common but still small in percentage terms. Templeton Global Bond TPINX has 5% of its assets in Egyptian sovereign debt, while T. Rowe Price Emerging Markets Bond PREMX owns 1%.

The upheaval will roil global oil prices and hurt economic growth, though. Crude prices were volatile during Egypt's protests, and Libya's conflict has spurred prices again.

The Points
* Goldman Sachs included Egypt in the Next Eleven (N-11), a list of countries deemed likely to join established emerging markets, such as Brazil, among the world's largest economies. Based on 2010 data from the International Monetary Fund, Egypt is not among the group's most prominent members. Within the N-11, the country has the sixth-highest nominal GDP ($217 billion) and eighth-highest real GDP growth rate (5.3%).

* Several mutual funds with heavy exposure to the Middle East have been launched in just the past four years. One is T. Rowe Price Africa & Middle East, which has 9.3% in Egypt-domiciled stocks. As of Feb. 7, Rohm believes that some valuations in the region now look more attractive, assuming the region's long-term fundamentals remain intact.

* Egypt's closure of the stock market was a rare event, but it has happened in other countries before: Russia closed its stock market in late 2008. The closure has created an odd circumstance for narrowly focused ETFs. Market Vectors Egypt Index ETF, for example, has been trading at a hefty premium to its net asset value, because investors seem to be willing to bet on a rebound even if they technically are paying more than the last available value of the index fund's stocks.

* Turmoil has spread to other countries, including Bahrain, Libya, and Yemen, causing oil prices to spike. A continued rise in oil prices could hurt U.S. economic growth. JP Morgan estimates that a rise in oil prices up to its 2008 peak of $145 per barrel would slash the economic growth rate by 1.5 percentage points.

"We think when we get through this we have the ability to earn a fairly high yield during this period of volatility. And a new regime [in Egypt] will likely have a lower risk premium than the past. It looks like it will be a more democratic and pluralistic society, and as a result that could be a long-term positive."
Michael Hasenstab
Manager, Templeton Global Bond

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