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Egypt unrest may hit Middle East, Africa investment

Egypt unrest may hit Middle East, Africa investment

Egypt could be catalyst for MENA investment withdrawal; Youth unemployment, inflation potential flashpoints; Gulf markets, longer-term prospects still seen positive.

January 27, 2011 2:44 by

Mass protests in Egypt, one of the darlings of African and Middle Eastern investors, sharply increase the risks that international investors will withdraw funds from some other economies in the region.

Fund managers were relatively sanguine about the upheaval in Tunisia which drove President Zine al-Abidine Ben Ali to flee earlier this month, as Tunisia is a frontier market which doesn’t feature on many portfolio managers’ radar screens.

But they did then point to the potential for contagion across parts of the Middle East and North Africa (MENA), with Gulf markets seen as relatively insulated, but Egypt an especially big risk.

That contagion appears to have started.

Egypt’s currency hit a near-six year low, stocks fell 6 percent and debt insurance costs soared to their highest in 18 months on Wednesday, a day after massive “Day of Wrath” demonstrations called for an end to President Hosni Mubarak’s 30-year rule.

Protesters who tried to gather on Wednesday were quickly dispersed and the government said it was banning demonstrations.

But significant damage has been done to investor confidence. At least $150 million left Egyptian local bond markets on Wednesday, according to data from investment bank Citi.

“The more tension that develops in the Middle East and Africa, the more readily investors will choose safety over capital gains, and thus eschew investments in the area,” said Tom Dorsey, president at investment advisers Dorsey, Wright & Assoc.

“Cash is preferable over equities in Egypt today, and that will be my path until the markets suggest otherwise.”

Egypt makes up only a small proportion of the benchmark MSCI emerging equities index, but has been a favourite among both MENA and Africa investors, due to the government’s readiness to embrace financial reforms, a young population, growing consumer demand and relatively cheap stock market valuations.

It also features in Goldman Sachs’ N-11 list — the next 11 economies after the BRIC economies of Brazil, Russia, India and China, for which the U.S. investment bank sees rapid growth.

Egypt’s stock market rallied 15 percent last year and foreigners account for around 16 percent of the Egyptian stock exchange’s total trading value over the last five years.

But the rising young population in Egypt and elsewhere in the region can be a double-edged sword, as a jobless population is more likely to stir political unrest.

Average youth unemployment in MENA is almost 30 percent, World Bank data shows, nearly double the levels in Latin America and Eastern Europe.

“One of the risks in the region is destabilisation in politics,” said Ghadir Abu Leil-Cooper, head of emerging equities at Baring Asset Management, whose MENA fund is invested in Egypt.

“In Egypt, we are not there with regime change. Am I watching it very closely? Yes. Do I know the outcome? No. Do I think that Egyptian asset prices look attractive? Yes, but there is no reason to rush into them.”

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