Egypt funds slump 40% in run up to clashes

Investors in Egyptian equities have seen the value of some funds fall by almost 40% over the last three years

The country was one of the first in the Middle East and North Africa to play host to government protests that would eventually spread across the region and become known as the Arab Spring. Demonstrations had remained largely peaceful – former president Hosni Mubarak’s government was ousted in 2011 – but violent clashes erupted last week between the country’s military and protesters loyal to his recently-ejected successor Mohamed Morsi.

Ishaq Siddiqi, a market strategist at spread betting firm ETX Capital, outlined the potential ripple effects of last week’s events in a note on Friday. He said that the resignation of vice-president Mohamed El Baradei “casts doubts over the transition of power from caretaker government to new as his exit could be the first of a few to come”.

He added: "An implosion of the interim government further delays the democratic process, throwing in uncertainty and instability for an extended period.”

In the three years running to the end of July, before the escalation of violence in the country, some funds were already down by over a third. The EFG Hermes Egypt fund lost 35.7% over the period while its sister fund, EFG Hermes Egypt Growth, was down 37.7%, according to data from FE Analytics.

The worst-performing Egyptian equity fund across all investment universes over the three years was the Market Vectors Egypt exchange-traded fund, which replicates the Market Vectors Egypt Index, investing in publicly traded companies that are domiciled and listed in Egypt. The fund lost 38.8%, according to FE Analytics.

The fund managers did not respond to requests for comment in time for publication.

Since protests in the country turned violent, global organisations including General Motors, Toyota and Electrolux have halted production in Egypt. This lead to a closure of the Egyptian Exchange on Thursday; the EGX 30 – an index of the largest, most liquid stocks in Egypt – had ended the previous day down 1.7% at 5,549,19. The exchange reopened on Sunday and the index fell further to 5,334.55 by the end of that day. The EGX 30 closed yesterday at 5329.19.

Waseem Khan, chief investment officer for private equity investments and managing partner at frontier market specialist Silk Invest, said it would take between three and five years for stability to return to Egypt. In the short term, he said, major challenges for the markets include a dearth of bank lending, foreign exchange challenges and disruptions in the social and political structure.

In its June market review, index provider MSCI said it was monitoring Egypt and was considering a public consultation on potentially excluding the country from its emerging markets index if conditions worsened. MSCI said it was concerned about the country's foreign exchange market and the liquidity in the Egyptian equity market.

ETX Capital’s Siddiqi warned that recent events could ultimately lead to a drawn-out period of instability in which Egypt’s services sector suffers as tourists remain wary, manufacturing and industrial activity halts and foreign investment deteriorates.

However, Khan at Silk Invest struck a more positive note about the country’s long-term prospects. He said: "The long-term potential of Egypt is very positive. From an investor point of view, we are very positive. It’s the short and medium-term where we see roadblocks."