Fund managers wary ahead of re-opening of Egypt’s financial markets

Cairo financial markets, due to re-opening this Sunday after a prolonged closure and a steep selloff, cannot look forward to much support from overseas portfolio managers who want more clarity on Egypt’s economic and corporate outlook before venturing back to the country’s newly cheap securities.

Seven out of ten fund managers interviewed by Reuters in a snap poll said they will not buy Egyptian securities just yet despite steep falls that have brought stock valuations to among the most attractive levels in the emerging market asset class.

With Cairo and much of Egypt still embroiled in political tension and protesters demanding an immediate end to President Hosni Mubarak’s 30 year rule, the country has ground to a standstill.

Economic growth and investment projects in North Africa’s biggest economy will almost certainly take a hit. And as turmoil also engulfs neighbouring states, there are big question marks on how investor friendly future government policy will be.

'Valuations look attractive if you are a short term trader. But we are long term investors and need to look ahead and see how all this will impact companies’ results, their cash flow generation and financing needs,’ said Dilek Capanoglu, chief investment officer for Global Emerging Markets at RCM, a company of Allianz Global Investors in Frankfurt.

‘You need to assess the danger to the overall economy, which has come to a standstill over the past two weeks,’ he added.

The mood now, two weeks into the mass demonstrations, is far worse than at the start of the week when hopes had grown for a peaceful and speedy transition of power. ‘A few days ago I was positive, now I am reassessing that,’ said Sven Richter, head of frontier markets at Renaissance Asset Managers, which has a big underweight on Egypt.

Foreigners held some $25 billion in Egyptian securities before the crisis, according to estimates by Barclays Capital. Egypt’s finance minister has offered little comfort, admitting economic loses from the unrest were ‘huge’.

With investors having been trapped into a closed market, another round of panic selling is likely when trading resumes on Sunday. ‘The markets did not give us a fair chance to exit and we did not want to add to the panic selling last week,’ said Nadi Burgatti, head of asset management at Shuaa Capital in Dubai.

Egyptian external bonds may fare better than the shares. Many argue the debt is trading cheap relative to the country’s credit ratings, given gross external sovereign debt is extremely low at just 17% of gross domestic product.

‘We are currently trying to increase exposure to external debt. From an external debt perspective, it’s difficult to see Egypt default whether Mubarak stays or goes,’ said Sergei Strigo, head of emerging debt at Amundi Asset Management.

One thing all investors agree on is that political reform in Egypt is overdue. But the worry is what policies the government will adopt once the protesters disperse. Monetary and fiscal tightening are crucial to stem inflation but will certainly depress consumption and corporate margins at least short term.