Egypt is a domestic demand story that offers a lot of promise — if the necessary reforms are carried through. A democracy in name only, Egypt has had to deal with authoritarian governments that have finally realized that the economy needs to be liberalized in order to fulfill its full potential. Long standing authoritarian President Hosni Mubarak has done a lot to reform the economy, while also maintaining grip on political power.

Egypt’s economic growth has averaged 4.9% in the 2000 to 2009 period and it was accelerating notably to 6.7% in the first part of 2008 before the economy downshifted towards the 5% level again. However, considering that Egypt is a domestic demand-driven economy, a full recession was averted and I think the nation has years of growth ahead of it.

Even though GDP is reported to be in the range of $190 billion, the real GDP level is more likely close to $300 billion. This is the issue with many emerging markets — high taxation often results in higher cash transactions and the underreporting of GDP by a factor of 30% to 50%. Also, the tendency of the central bank to run monetary policy that has negative real interest rates with a discount rate of 8.5% with inflation of 11.8% may be spun as necessary in challenging year like 2009, but over time it does create issues with inflation and exchange-rate instability similar to those in Argentina.

Two ETFs to Play Egypt

In the U.S., we have a choice of two ways to play this CIVETS member: directly via the Egypt Index ETF (NYSE: EGPT) or indirectly via the Africa ETF (NYSE: AFK), where Egypt is a large weighting due to its status as the largest economy in Northern Africa.

EGPT is weighted 46% towards financials, which is a positive for a rapidly-developing economy, 16.8% towards telecommunications, and 16.3% and 14.9% towards materials and industrials, respectively. Its largest holdings are below:

Now, one thing you need to remember about ETF companies is that they are more than willing to repackage anything that could give them a first-mover advantage in a sector or assets class in order to drive growth into that ETF so they can pocket the largest amount of fees.

In the case of Market Vectors, they have done a good job of going after sectors or emerging markets that were not previously covered. Some examples: the Indonesia ETF (NYSE: IDX), the Brazil Small-Cap ETF (NYSE: BRF), the Vietnam ETF (NYSE: VNM) and the Junior Gold Miners ETF (NYSE: GDXJ). With that said, covering previously uncovered sectors may make for some illiquid volumes for some time.

One drawback with this ETF is that it has only has $3.5 million assets under management. This makes for relatively illiquid trading volumes and underscores the necessity for limit orders when trading. In comparison, assets under management for the Africa Index ETF (NYSE: AFK) are $58.7 million.

This is the first time that I have seen a major gold procurer included in an emerging market ETF. Centamin Egypt Limited (London: CEY, Toronto: CEE) is a rapidly-growing gold producer that commenced operations in June 2009 — making it the first modern mining company in Egypt, a nation that used to be a major gold producer many centuries ago. This year, Centamin is scheduled to produce 200,000 ounces of gold with a cost basis that is among the lowest in the industry. And within the next three years, production is expected to reach 500,000 ounces annually.

This is why the shares are trading near all-time highs even despite the pullback in gold bullion. This rapidly-growing low-cost producer is completely unhedged, which is a big reason why Paulson & Co. has taken a stake.

The shares trade on the gray market in the U.S. — which means that they are the Canadian securities, not ADRs, under the symbol CELTF. It usually trades about 20,000 shares a day, which is not bad for gray market securities. I don’t like trading in gray market share as a rule, but this is a gold mine that has a bright future that is capitalized at $2.7 billion. If you are interested, I advise that you only use limit orders to avoid getting burned and paying a premium.

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