Despite the tumultuous time the country has been through since the 2011 Arab Spring and even though its economy is in a state of crisis, Egypt’s stock market was, surprisingly, one of the best performing markets in 2012. This makes investors such as Larry Seruma, Managing Principal at Nile Capital Management in New York, believe that 2013 could be an even better year to invest in Egyptian equities for those investors willing enough to take a long-term view on the country’s potential.
“There are many good companies in Egypt that are well capitalized and well managed and they provide great long-term prospects for any careful investor who is willing to research good businesses and buy now when everyone else is afraid,” Seruma said. “Overall, Egypt offers good long-term growth prospects. It is strategically placed in the Middle East and it has a young population. The country is suffering now as a result of depressed fundamentals, but this is a good time to invest if you are willing to be patient.”
Large Egyptian companies that have international business and good growth prospects, such as Orascom Constructions, a well-managed concern with a large presence outside Egypt, Seruma said. Banks are also a good investment bet, as are companies such as Juhayna Food Industries, a leading manufacturer specialized in the production, processing and packaging of milk, yoghurt, juice and juice, he added.
Seruma is basing his conviction on these and other companies on the belief that Egypt will very soon ink a deal with the International Monetary Fund (IMF). The country has been in talks with the IMF for some time and very nearly signed an agreement for a hefty loan in November. However, the measures required by the Fund at a time of great political sensitivity (elections will take place in February) did not go down very well and the deal was refused.
These talks are once again center stage and an IMF deal is crucial for Egypt at this stage, according to Paul Gamble, Director in the Sovereigns Group at Fitch Ratings in London, for the stability of the Egyptian pound, the exchange rate and to stabilize the country’s budgetary position. Egypt’s foreign currency reserves have also plummeted sharply and as the country is heavily import dependent, prices – particularly of fuel and food – have risen sharply, thereby raising the government’s subsidy bill.
“The reforms associated with the IMF program are key and really, are not so onerous or demanding,” Gamble said.
Meanwhile, the Egyptian Central Bank took a positive step by introducing foreign exchange auctions at the end of December, which resulted in a more market-determined exchange rate and a depreciation of the Egyptian pound. However, although the measure provides a small reprieve, the depreciation of the pound is unlikely to provide much support to the balance of payments, which has suffered from the impact of political unrest on tourism and capital inflows. Suez Canal receipts, remittances and oil exports, Egypt’s main revenue sources, are also not responsive to movements in the pound, Gamble says, and any currency weakness will deter foreign portfolio investors in the short term.
However, “once the pound stabilizes, and we’re not sure exactly when that would be, you would see more foreign portfolio investment into Egypt, both in the equity and the domestic debt markets,” Gamble said. “A lot of investors have been wary about Egypt because of the perceived overvaluation of the currency, so if it moves to a more sustainable market-determined level, you’d see some short-term investment activity.”
Overall, though, many Egyptian listed companies have had a solid performance despite the macro level instability in the country. A number of listed companies are sitting on quite a bit of cash and have been fairly conservative in their businesses, according to Gamble. “They are well positioned for an improvement and will benefit if Egypt is perceived as getting closer to an IMF deal,” he said.
While waiting for the IMF loan, Egypt bas benefitted from the help of countries such as Qatar and Turkey, Seruma said, and will continue to get support from the Gulf and Middle Eastern nations. – Savita Iyer-Ahrestani