Egypt’s financial markets trying to get back to normal

Investors are right to be wary as a result of the current political turmoil in Egypt with the most obvious financial effects being oil prices, the trade route through the Suez Canal and tourism, according to experts.

Banks are now re-opening although the country’s Stock Exchange will stay shut until Sunday February 13. The Cairo bourse closed down on January 27, after 70 billion Egyptian pounds ($12 billion dollars) was wiped off shares in 48 hours.

‘The exchange, closed because of events, will reopen February 13. Between now and then the situation should stabilise. The banking system should by then be working at full capacity and the opening should be steady,’ said spokesman Hisham Turk.

The banks were temporarily closed during the crisis, amid fears that depositors would rush to withdraw their cash, but reopened on Sunday when long lines formed in front of many branches.

One of the main impacts has been on the price of oil. ‘With Brent Crude breaking the $100 barrel for the first time in two years, it is evident that political unrest in Egypt is having a significant effect on the oil markets,’ said Angelos Damaskos, chief executive officer, Sector Investment Managers and Fund Advisor, Junior Oils Trust.

He pointed out that Egypt has a rich supply of natural resources such as gold, oil and gas which are hard currency earners for the country and it would be hugely damaging to Egypt’s economy if the supply of any of these was disrupted.

‘There are concerns about disruption to supplies coming through the Suez Canal. However, we highly doubt that the canal will be obstructed as the current unrest only involves civilians protesting against the incumbent government,’ he said.

But he reckons there is likely to be political unrest in Egypt for some time and any incoming government would be unwise to take any action which negatively impacts the country’s natural resources.

‘The markets may have over reacted to this political upheaval which we doubt can spread beyond Egypt and Tunisia. As part of our fund selection criteria we are keen to avoid areas of political risk and only hold a handful of companies with exposure to North Africa, which generally account for a small percentage of the fund. When investing in oil producers it’s important to have a diversified portfolio to help mitigate company or country-specific disappointments,’ he explained.

Ian Howe, managing director at Baigrie Davies believes that for investors with an interest in Egypt the biggest area of concern is the affect it will have on the crucial trade route of the Suez Canal. ‘Egypt is an important cotton exporter so expect the price of cotton to rise, which may boost the value of commodity funds in the short and medium term. Oil price has again moved upwards, petrol prices likely to go higher with the knock on effect of pushing food and goods costs up further and sending inflation up. If people stop spending, this will hit the economic recovery,’ he said.

‘With trade routes through the Suez under question, tourism badly affected and Barclays and HSBC closing banks and branches in Egypt, investors are right to be wary. Liquidity problems could become an issue as investors become nervous about bank debt defaults,’ he explained.

‘However, similar situations have occurred across the Middle East in the past, recently in Dubai, which led to turbulent days on the FTSE, although the long term impact was minimal. Those taking long positions should not panic. Our advice is to remain invested but keep a watchful eye on how the difficulties in the Middle East unfold,’ he added.