By Matein Khalid: Chief Investment Officer and Partner at Asas Capital
It is impossible to grasp the investment potential or the risk spectrum of a frontier/emerging market without visiting it and meeting its banking/corporate elite, its regulators, its central bankers – but also (if possible) its writers, thinkers, artists and academics. In my quest to understand Egypt, called the “gift of the Nile” by Herodotus 2500 years ago, I not only attended investment conferences in Sharm al-Sheikh luxury hotels but also partied with the money tenders/private equity maestros of Misr in Zamalek clubs. I also devoured the novels of the Arab world’s only Noble laureate for literature Naguib Mahfouz, who took me on magic realism tours of Fatimid, Mamluk, Khedivian and post 1952 Free Officers coup Cairo in his Palace Walk trilogy, with a textured genius reminiscent of Dickensian London, Proust’s Belle Époque Paris, Joyce’s Dublin and Dostoevsky’s St. Petersburg.
Egypt literally bewitched my soul from the first time I saw Cairo – from the pyramids of Giza to the sublime medieval beauty of the Citadel/Khan el-Khalili and the jeunesse dorée hangouts of Zamalek. I even went to Café Groppi, where King Farouk met a teenage Nariman Sadek, his second queen. I must have read the “English Patient” a half dozen times because Count Almasy’s deathbed memories evoked Cairo in 1942, when Rommel and Monty’s epic tank battles in the Western Desert decided the fate of the world.
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At the end of a tragic decade for the Arab world, I consider Egypt to be one of its great strategic investment opportunities. Why? One, Egypt’s geo-economic location at the crossroads of Africa, the Middle East and Europe’s Mare Nostrum (the Med!) means it is avidly courted by the Great Powers and regional states. China and the US compete over Egypt. Russia views its 100 million people and $700 billion economy as its gateway to the Arab world.
France has had a historic obsession with Egypt since Napoleon, Britain since Sir Anthony Eden. Israel’s Camp David peace treaty and stability in Gaza hinges on Egypt. Turkey cannot escape the legacy of four Ottoman centuries, when its thirty two sultan-caliphs ruled the Nile Valley after Selim Yavuz conquered the land from the Mamluks. Saudi Arabia, Kuwait and the UAE finance Egypt’s President Sisi to preserve the political stability of the Arab world. In geopolitics, Cairo is literally Umm Duniya, the mother of the world.
Two, Egypt’s government is pro-reform, pro-West, pro-development and determined to leverage its position as the terminus of a New Silk Road/host of the Suez Canal, one of the world’s great crude oil and petrochemical tanker shipping chokepoints. After a draconian 50% devaluation of the Egyptian pound in November 2016, Egypt has attracted $45 billion in central bank reserves and achieved macroeconomic stability, with 5% plus GDP growth though inflation is still high at 9%. Egypt’s pound has actually appreciated 5% since its post devaluation bottom against King Dollar. The Central bank of Egypt has cut its policy interest rate by 450 basis points in 2019.
Three, President Sisi has not hesitated to implement fiscal reforms that even eluded Nasser, Sadat and Hosni Mubarak, such as his decision to eliminate subsidies on fuel and electricity. The $12 billion IMF loan program has restructured Egypt’s economy and attracted desperately needed FDI. The IMF projects Egypt’s real GDP growth will be 6% next year and the government is making progress on the milestones agreed with the Bretton Woods twins. The “Arab tiger on the Nile” is stirring once again.
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The yield on Egyptian government bills, notes and bonds have fallen dramatically with the fall of inflation, as has the budget deficit and the unemployment rate. Egypt is my favourite stock market play in 2020. Why?
One, Egypt has implemented critical structural economic reforms mandated by the November 2016 IMF bailout deal. After three years of austerity in the IMF operating theatre, Egypt will grow at 6% in 2020.
Two, Egypt’s LNG and natural gas production plants in the Sinai and oil deposits in the Western Desert makes it at least partially a petro-economy, especially when added to Suez Canals tolls from crude/petrochemical tanker traffic and remittances from the estimated 2 million Egyptian diaspora in the GCC.
Prince Abdelaziz bin Salman of Saudi Arabia and Sascha Novak of Russia have raised the OPEC plus output to 1.7 MBD in the last Vienna ministerial conclave. This led to a rise in Brent crude oil prices that has tangible benefits for Egypt’s energy companies. As a tourist destination (tourism was 10% of GDP in the pre-Tahrir Square era), Egypt is dirt cheap for Saudi/GCC visitors, who are either discouraged or banned from traveling to the Levant.
Three, despite the street protests in Egyptian cities and sporadic terrorist violence in the Nile Delta/Sinai, Egypt’s President Sisi has been in office for six years and has consolidated power within the military, business and technocratic-bureaucratic elite. Egypt, unlike Libya, Iraq, Yemen or Syria, is a strong, stable state not fragmented by sectarian, ethnic or tribal fault lines.
Four, President Sisi has stabilized the Egyptian pound in the past year by offering global hedge funds some of the highest interest rates on the planet and implementing bold, even painful policy reforms. I was thrilled to see Euromoney, the trade journal of international banking, choose Egypt (and Romania) as its most exciting, most improved “country risk” choices in the frontier/emerging markets.
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True, the budget deficit, the mass poverty and near double digit inflation do not mean Egypt is a no-brainer El Dorado for global investors yet I believe 6% GDP growth, positive delta in capex/tourism and (devaluation cheapened) exports, $45 billion in gold and a central bank foreign exchange reserve and a stable pound make Misr a potential 2020 emerging market Cinderella for me. For once, the IMF’s $12 billion extended term facility did not end up in ‘IMF bread riots’ or attempted military coups d’état, the dismal economic backdrop that preceded President Sadat’s historic trip to Jerusalem, address to the Israeli Knesset and the Camp David peace treaty in the late 1970’s.
Five, Egypt’s EGX30 index lagged the MSCI emerging market index, let alone the fabulous party on Wall Street, with a mediocre 7% return in 2019. Lakin Maalish, Basha! Unlike the human brain, financial markets discount the future and not extrapolate (or obsess over) the pain of the recent past. Successful investment requires an instinct for living in the second derivative, the twilight zone that constitutes macro inflection points, second nature for me. I see this happening in Egypt next year.
Macroeconomic stability, at least another 200 basis point cut in interest rates by the central bank, 17 – 20% EPS growth in the stocks I love trading at 10 – 12 times forward earnings, the IPO of Banque du Caire (the Egyptian elite was once Francophone – just listen to Dalida!), the most exciting privatization pipeline since the Youssef Boutros-Ghali era and a free float, inexpensive currency now define Egypt. If all this does not make Egypt the most attractive stock market in MENA next year, I better exile myself to Planet Dumbo for eternity. Yet financial markets can be cruel, capricious and infested with grey/black swans, as I have learnt the hard way in my journey across some of the planet’s darkest alleys in the Third World.
It is never prudent to count your macro chickens before they are conceived, let alone hatched in MENA, though I stand guilty of doing just that in this rhapsodic paean on Misr, my helwa ya baladi! Hopefully, 2020 will be the year to both make big money on the Cairo Alexandria Stock Exchange, a 140 year bourse that was once the most active between London and Bombay in Queen Victoria’s reign – as well as search for the ghosts of the Pharoahs, caliphs, poets, storytellers, darwishes and writers of Cairo who have enchanted me all my life!