To us, it is predictable that the Egyptian market will be down over the next few trading sessions, and will remain volatile for some time. There is understandably pressure from investors to pare risk as Egypt sorts out its political affairs, and we believe that the recovery in the market is likely to take time. In our view, the market’s recovery depends on the speed and nature of Egypt’s political and economic reforms, which will determine the course of the country’s economy in the medium and long term. We are however encouraged by the process thus far. On Sunday, a referendum was held on proposed constitutional amendments – among them limits to presidential terms and judicial supervision of the election process – which paves the way for an election this fall. Should the process continue to move forward smoothly it will help to restore confidence in Egypt’s market.
Selling is also expected to vary between sectors, with firms that were strongly tied to the former regime facing additional pressure. Stocks related to consumer goods are thus likely to do relatively better, with those that are tied to political risk – for example Ezz Steel, whose chairman is being investigated for corruption – showing more weakness. In addition, we would expect to see firms with significant ex-Egypt exposure (of whom there are many listed on the Egyptian exchange) do relatively better as a whole in the short term. Because their operations are not necessarily highly dependent on the Egyptian market, their earnings often are not highly correlated to Egypt’s economic growth.
In the long term, our thesis remains strong that Egypt has the potential for significant growth. As we wrote here, we believe that short term volatility is to be expected, but in the longer term macroeconomic conditions are likely to remain favorable. Egypt is a young country, and rising demand for consumer goods, banking products, and affordable housing continues to make it an attractive destination for selective, long term investors.
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