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Egypt elections worry foreign funds; economy buoyant

Yet the country's buoyant economy should help it remain an attractive destination for emerging market funds.

December 1, 2010 4:21 by



Egypt’s parliamentary elections produced an overwhelming victory for President Hosni Mubarak’s ruling party, but voting was marred by a low turnout and opposition complaints of fraud and bullying, raising political risk worries among foreign investors.

Yet the country’s buoyant economy should help it remain an attractive destination for emerging market funds.

The Muslim Brotherhood said it had won no seats in Sunday’s first round of a vote it said was rigged, but a few candidates would stand in a run-off, scheduled for Dec. 5.

“Reports of alleged abuses do raise political risk,” said Angus Blair, Beltone Financial head of research in Cairo.

“If reports are true that neither the Muslim Brotherhood nor the Wafd party won any seats it will be worrying – Egypt needs a pluralistic parliament. The alternative is more dissent.”

The Brotherhood is the main rival of the ruling National Democratic Party (NDP) and its candidates run as independents to escape a ban on religious parties.

“There are a lot of reformers in the NDP who are committed to change and the absence of opposition MPs will not help them either,” said Blair.

Charges of ballot stuffing, bullying and other trickery marred Sunday’s vote. The government said the election was fair, with a state-linked body estimating a quarter of the 41 million registered voters cast ballots, although an opposition group said turnout was as low as 10 percent in the constituencies it monitored.

The parliamentary elections may indicate how the government will conduct the 2011 presidential election. Hosni Mubarak has been in power since 1981 and has yet to state whether he will run again.

“Next year will be very interesting politically because a lot of people in business are becoming increasingly frustrated at the lack of political pluralism in Egypt,” said Beltone’s Blair.

Egypt’s economy is forecast to grow 5.5 percent in 2010 – 2011, according to analysts polled by Reuters, while Cairo’s main stock index is up nearly 8 percent this year, second only to Qatar in the Middle East.

“Egypt’s Q3 earnings were fine – economic growth is good, there is very high domestic liquidity and strong local demand, which is why foreign investors like Egypt,” said Blair.

State bureaucracy, while less onerous than before, continues to constrain economic growth, he added, but manufacturing receives significant foreign investment.

Market volumes sagged before the parliamentary elections and trading is expected to remain lacklustre until the vote run-off.

TURKEY SLUMPS

The main Istanbul index  fell 3.1 percent on Monday, slumping to a two-month low as a European Union bailout of Ireland failed to curb risk aversion focused on euro zone debt concerns.

The Turkish index is 70 percent foreign-owned, making it highly sensitive to broader investor sentiment. Having gained more than twice as much this year as the MSCI emerging markets index, Turkish shares have sold off in the past few weeks.

Middle East stocks also tracked global market trends, but declines were minor.

PETROCHEMICALS

Oil prices steadied this week, bolstering sentiment in the world’s top exporting region. Crude held around $84 a barrel as an 85 billion euro bailout package for debt-soaked Ireland provided some confidence energy demand growth would remain resilient next year.

The Middle East energy sector is largely state-owned and off-limits to equity investors, so petrochemicals stocks are favoured as a proxy, with Saudi Arabia’s petrochemicals index up 15 percent in 2010. The main Saudi index has gained 3.6 percent over the same period.

“Oil prices are holding up well and that is reflected in petrochemical prices,” says Ankit Gupta, senior research analyst at Securities & Investment Co (SICO) in Bahrain.

“Regional petrochemicals producers are enjoying higher production and higher prices, so we expect a significant improvement in earnings in Q4.”

Most petrochemical product prices have increased by more than 10 percent quarter-on-quarter and while the European debt crisis contagion may yet hurt oil prices, December petrochemical contracts are already signed, so any drop in crude will have minimal impact on producers’ fourth-quarter earnings.

“I don’t think sector valuations are yet stretched and we’re bullish on selective stocks,” said Gupta.

He named Industries Qatar , Saudi Basic Industries Corp (SABIC), Yanbu National Petrochemical Co (Yansab) and National Industrialization Co (Tasnee) as preferred picks, predicting the latter would enjoy a big increase in revenues from its titanium business, while it is trading a relatively cheap price to earnings ratio of 10.

FERTILISERS

Food producers have increased production to meet a global shortfall as fire and drought destroyed a quarter of Russia’s grain crop, boosting fertiliser use, in particular urea, Gupta said.

“IQ and Safco (Saudi Arabian Fertilizers Co) have substantial urea production capacity and a cost structure that is pretty fixed, so what happens to the top line will be substantially reflected in the bottom line,” said SICO’s Gupta.

“SAFCO’s profit margins are also around 70 percent or more, compared to only 10 -15 percent for companies from other regions.”

This huge competitive advantage is based on Gulf producers’ access to cheap energy, Gupta added.



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