In Focus: The Riddle of the Sands? Egypt is Politically Volatile, but Appeals to investors
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Continuing political unrest in Egypt ahead of this month’s presidential elections claimed another 11 lives and injured another 160 people in the streets of Cairo last week, media outlets reported; over the weekend, hundreds of protestors were arrested. And yet, Egypt retains its crown as the best-performing emerging market of 2012.
There are plenty of reasons to be concerned about Egypt’s future: not only is the country’s future leadership in flux and its transition to democracy encountering many bumps along the road, but the economic picture is opaque; clearly, the political turmoil is taking some kind of toll on growth.
Still, in a demonstration that greed can often transcend fear, the country’s stock market has remained remarkably robust. Indeed, so hungry for returns and comfortable with risk have investors been that in a single week in March, the Market Vectors Egypt Index ETF soared 48%. As of this writing, Egypt remains the unquestioned winner among emerging markets, up more than 40% year to date with its nearest rival, Colombia, trailing by more than 10 percentage points.
The gains have come from stocks that range from telecommunications to more traditional Egyptian industries, including textiles. By far the most dramatic move has come from the Egyptian Company for Mobile Services (EMOB.CA), better known as Mobinil, which is up 150% despite reporting a first-quarter loss and describing the outlook for business this year as politically “volatile” and, from a regulatory point of view, “unstable”. (See the company’s comments on its results in this Reuters news story.) Egypt’s largest steel producer, Ezz Steel (ESRS.CA) is hanging on to a 95.7% return for the year, despite reporting that its profits have dipped. Other big contributors to the index’s gains include real estate developer Palm Hills Developments (PHDC.CA) and Orascom Construction Industries (ORSDF.PK), up 76% and 36.5%, respectively.
In part, what has been happening in Egypt is simply a more extreme version of a resurgence in investor interest in so-called “frontier markets”: emerging markets that still have many risks, whether in their market structure, political system or the uncertain outlook for economic growth. Investors who cut their teeth investing in the first wave of emerging markets in the 1990s – Mexico, Thailand, Korea and Taiwan, to name a few – and then moved on to the “BRIC” countries (Brazil, Russia, India and China) in the last decade are now eager to move on to the next “new new thing”. For some of them, that is frontier markets. Of the emerging markets nations whose stock markets have done well this year, several fall into this category: Colombia, Chile, Peru and Turkey, to name a few.
Why Egypt? Well, all those risks make the potential upside all the more dramatic – should it materialize. On the fringes, there have been bits of good news. Last month, for instance, the interim government finally agreed to the terms of a new $3.2 billion IMF loan. Previously, it had rejected this funding, arguing that even the 1.5% interest rate would be too significant a debt burden for an interim legislature to approve. But given the slide in foreign reserves – and the slump in tourism as a result of the persistent levels of protest, riots and other violence, as well as waves of strikes, they moved ahead with the funding. Still, there are other fundamental arguments in favor of betting that Egypt could be in the very earliest stages of a turnaround. As the chart below shows, industrial production has rebounded dramatically last year, far more so than is the case of Tunisia, whose own political revolution ignited the events that have come to be referred to as the “Arab Spring”.
Still, it’s worth remembering that Egypt’s political culture, its economy and its financial markets are starting from a very low base. One reason it is this year’s best-performing financial market is that – thanks to the tremendous political instability that led up to and followed the ouster of former President Hosni Mubarak – it was the worst performing emerging market of 2011, when Egyptian stocks lost nearly 47% of their value. And if the violence worsens as the run-off election approaches in June, uneasy investors could well decide that enough is enough.
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