Forget Egypt ETF – Watch Turkey ETF for Mideast Profit Opportunity

by Charles Sizemore | February 25, 2011 2:00 am

In February, the world watched with a mixture of shock and elation as Egypt’s idealistic youth toppled the 30-year dictatorship of Hosni Mubarak with a peaceful show of resolve.  With the army now in control of the country — and promising free elections in six months — it remains to be seen how events will ultimately unfold. We certainly wish the best for the Egyptian people in this exciting period in history.

As investors, however, we cannot let misty-eyed sentimentality affect our decision making. To borrow a phrase from John Maynard Keynes, it may stir the “animal spirits” to see political freedom spreading across the Middle East, but this does not mean that we should be tempted to buy Egyptian stocks. Yet that is exactly what Western investors are doing, if we are to judge the performance of the Market Vectors Egypt ETF (NYSE: EGPT[1]).

egpt egypt etf

Egypt’s Big Rally

Egyptian stocks have enjoyed quite the rally since Mr. Mubarak was shown the door.  The Egypt ETF is now trading at levels significantly higher than just six months ago. There is an odd tendency in the West to automatically associate democracy with economic freedom, but there is no reason to assume that one automatically follows the other.

Muddled Egypt Outlook

Democracy—if it truly comes to Egypt—simply means that Egyptians will be able to vote. What they will vote for is anyone’s guess, but there is no guarantee that it will be market friendly.

Given that even mature democracies like the United States regularly succumb to bad populist trade policies, the outlook for Egypt is muddled at best. And the possibility that Egypt will collapse into instability or even civil war once the revolutionary honeymoon is over is very real.

Had Egypt’s stock market sold off to true panic levels, I might advocate buying up a basket of the country’s blue chips. At some price, it is worth the risk. But as things stand now, you’re just not being compensated for what could go wrong in this trade.

Look Elsewhere

Instead of Egypt, investors might want to look across the Mediterranean to Turkey. Turkey is in an excellent position to prosper in the years ahead. It is a vital link between the mature markets of Europe and the emerging markets of the Middle East and Eastern Europe. Turkey is home to many world-class companies like Sizemore Investment Letter [2]favorite Turkcell (NYSE: TKC[3]), and—at least compared to the rest of the region—is politically stable, having already travelled the rocky road towards democracy that Egypt is navigating today.

Like most emerging markets, Turkey has been hit hard in early 2011 by a return of risk aversion and by the destabilizing effects of local inflation. Turkish stocks trade at a P/E of only 12, according to the Financial Times, making Turkey one of the cheapest markets in the world.

Your Best Investing Move Now

Buy shares of the iShares MSCI Turkey ETF (NYSE: TUR[4]) below $60, and plan to sell in six to twelve months or at a gain of 30%. Set an initial stop loss at around $50; a break below this level might indicate a deeper, longer-lasting correction.

Be patient with this trade, but also protect yourself.  Emerging markets are suffering through a volatile correction right now. I consider this a good buying opportunity based on valuations and sentiment, but I am also keenly aware that emerging market sell-offs can take on a life of their own when Western investors decide to flee en masse. Make sure you follow your sell discipline on this trade.

Charles Lewis Sizemore, CFA, is editor of the Sizemore Investment Letter[5].

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  5. Sizemore Investment Letter:

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