[lbo-talk] Sizing up the revolution

Marv Gandall marvgand at gmail.com
Sat Feb 12 07:02:35 PST 2011


(Global capital's early verdict: "This is a buying opportunity, a major positive development, sentiment has gone sky high, think Turkey not Iran", but (nervously) "the rise of a regime opposed to free-market capitalism cannot be completely ruled out.")

Egyptian Stocks Are Ready to Rally By VITO J. RACANELLI Barron's February 12 2011

Stocks could surge when trading in Cairo resumes after a two-week shutdown. Here are five promising names and an intriguing ETF. How to play a revolution.

Friday's ouster of Egypt's authoritarian president, Hosni Mubarak, after 18 days of protest by hundreds of thousands will be celebrated loudly in the streets of Cairo this weekend. It's likely the country's stock market will follow that lead.

Despite the high uncertainty about what comes next, Mubarak's exit after 30 years in power will probably push Egyptian stocks sharply higher at the scheduled open Sunday, Feb. 13. The stock market has been closed since Jan. 27.

Equity proxies in the U.S. and London that have kept on trading while the local market was closed, such as the Market Vectors Egypt Index exchange-traded fund (ticker: EGPT), suggest Cairo stocks could jump some 15% from their depressed levels in late January.

The toppling of the Egyptian strongman lifted Middle East and Africa indexes about 1% on Friday. In the U.S., the Dow Jones Industrial Average rose 0.36% to a 2 1/2-year high, as worries about the Middle East eased.

The NYSE-traded Egypt ETF finished around 18.66 Friday, up about 15% from its own low, 16.22, set Jan. 28, the day after the doors closed at the Cairo exchange. In London, Egyptian stocks jumped Friday, after a slump leading into the crisis. The EGX 30, an index of the 30 most highly capitalized and liquid stocks traded on the Egyptian exchange, finished at 5646.50 before the shutdown, off 27% from 2010 highs.

Egypt's vice president, Omar Suleiman, said Friday that a military council would run Egypt until a free presidential election is held, which is promised for September. International investors with exposure to the world's most populous Arab country are divided about what the future will bring.

"The market open might be a bit of a mess," says Baldwin Berges, managing director of Silk Invest in London, which owns Egyptian stocks. Local investors he's spoken with say they have cash to put to work when the market opens. "The Egyptian business elite seem to be in favor of Mubarak's exit," Berges adds.

"This is a buying opportunity but it's worth waiting a couple of days to see the smoke clear," he opines. "It's a major positive development…but [in the emerging world] you can't invest without the volatility."

Angus Blair, a Cairo-based head of research for investment bank Beltone Financial, says "I expect a lot of money coming in. There were big orders to sell [Thursday when it seemed Mubarak wasn't leaving], but I expect them to be cancelled…. Sentiment has gone sky high."

There are caveats aplenty. Besides the risk of chaos, for both the Egyptian population and foreign investors, the rise of a regime opposed to free-market capitalism cannot be completely ruled out. A quick transition to some kind of stable and capitalist-oriented democracy is hardly assured, no matter how much the world seems to want it.

Eric Fine, who runs the Van Eck Global G-175 Strategies, notes Egypt has many very poor, uneducated and unemployed people. "Inflation is running at 10% and food inflation near double that," he says. This is not the type of country where a technocratic government could readily take hold.

Hani Sabra, a Middle East and Africa analyst for political consultancy EurAsia Group, says the more likely scenario from here is that the military, whose reputation has been enhanced by the role it played in the revolution, will negotiate terms with the opposition groups for a transition and new order where it will have significant say. "Think Turkey," he says, "not Iran."

FOR INVESTORS THINKING of taking the plunge, Egyptian stocks have both political risk and low liquidity. In terms of the world's market capitalization, Egypt's financial markets are minuscule. EPFR Global, which follows institutional fund flows around the world, tracks just four funds in Egypt, with a modest $163 million in combined assets. Assets for Middle East and Middle East/Africa funds and ETFs are about $2 billion each, according to EFPR. While that doesn't include individuals' holdings, that's still a tiny part of the trillions invested globally.

Stocks of Egyptian companies could jump 15% as trading reopens. But investors may need nerves of steel: Political risk is high and liquidity is low, meaning it could be hard to exit.

Silk Road's Berges likes Orascom Construction Industries (ORSCY), the largest company in the EGX 30, calling it a cheap stock and one of the most competitive emerging market companies. He also likes Orascom Telecom Holding (ORTE.Egypt) and Maridive & Oil Services (MOIL.Egypt), which he says gets about 90% of its mostly dollar earnings outside its home country.

That stock is also a favorite of Larry Seruma, managing principal at Nile Capital Management, which has about 9% of its portfolio in Egyptian assets. He adds that ElSwedy Electric (SWDY.Egypt), a cable provider with revenue mostly in dollars, is worth a look.

Veteran emerging-markets money manager Axel Krohne likes Misr Duty Free (MFSC.Egypt), which operates duty-free shops and trades at 5.5 times trailing earnings per share. "If it drops a lot, I would be buying," he says.

Here's another caveat. There are stocks that are closely tied to the Mubarak regime, like Ezz Steel(ESRS.Egypt), whose shares could suffer now that the dictator is gone.

One thing is certain: Revolutions have rarely played out the way people expect.



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