Egypt is a bit far afield for AsianInvestor, we admit. But who hasn’t been captivated by events there, as the biggest population in the Arab world (83 million) wakes up from three decades of stagnation under Hosni Mubarak’s oppressive regime?
And, more to the point, does Egypt’s political upheaval – which sent the local stock market plummeting 20% before the exchange was closed – have any implications for regional or emerging-market portfolios?
The short answer is no. Despite Egypt’s political and cultural weight in the Middle East, its stock market is small, comprising only 0.4% of the MSCI Emerging Market Index. A post-war legacy of statism means this big country hits well below its weight in economic terms, accounting for only 0.3% of world GDP.
The only importance Egypt has to the world economy is the Suez canal, through which moves 1.5 million barrels of crude oil per day, notes MFS Investment Management. This may explain why the political demonstrations have spooked the oil markets.
Because the country has few thrilling listed companies, it plays a small role in the portfolios of emerging-market or Mena (Middle East & North Africa) funds. For example, it accounts for only 0.2% in Robeco’s Emerging Markets Equities fund, well below benchmark.
Similarly, ING Investment Management’s dedicated Mena team in Dubai says its exposure to Egypt is also underweight, at 11%, and what remains is a broad sampling rather than any conviction stocks.
Although the political turmoil is going to rattle the region, few emerging-market investors see fallout hitting their portfolios. Julian Mayo of Charlemagne Capital in London points out that, unlike Egypt, the other main markets of the Mena region are wealthy. Saudi Arabia, the United Arab Emirates and Kuwait can afford to subsidise their populations to a far greater extent.
ING notes that, beyond the politics of humiliation that underlie the uprising against Mubarak, dissatisfaction is also rooted in a lack of jobs, a lack of government subsidies on basic necessities, and the obvious pilfering of the greedy elite.
If anything, portfolio teams are optimistic. Although they note some bad (or even very bad) scenarios that can result, these are not considered the most likely. The most likely is a military-sponsored interim government that sets the stage for elections in which opposition parties, including the Muslim Brotherhood, participate.
The prospect of an Islamic party running Egypt is not to everyone’s taste, and could spook fund managers as much as it would American diplomats. However, there is no plausible or legitimate way to exclude the Muslim Brotherhood from some form of open political participation; and American diplomats seem to have accepted the reality that they can’t promote democracy in the Middle East without the presence of Islamist parties.
Besides, free and fair elections in Turkey, Indonesia and Pakistan show that, time and again, populations reject the hardline mullahs in favour of secular or mildly Islamist leaders.
More interesting is what this new government will eventually do. It will have to promote job creation through more foreign direct investment, without reneging on deals already cut with existing capitalists; and it may have to raise taxes to pay for the subsidies that poor people demand. This may or may not spell trouble for the future of the Egyptian economy, but if it is combined with liberalisation, things probably couldn’t get worse.
On the contrary, once the dust settles, a democratic, liberalising Egypt could finally be in a position to enjoy some of the growth that other big emerging markets such as Turkey and India have experienced.
ING, for one, says this is not the time for investors to abandon the Mena region. “It could be a good entry point for long-term investors,” says its team, led by CIO Farah Foustok.
Charlemagne’s Mayo says once a democracy is in place, tourism should flourish, and there will also be a boost in construction (i.e. cleaning up damage from the uprising). He believes as long as the new leadership isn’t stridently anti-capitalist, the country’s prospects are bright.
Meanwhile, for anyone with Mena or EM exposure with concerns about the impact of Egyptian People Power, the message from fund managers is: Carry on, and keep an eye out for value.