* Foreign funds net buyers of stocks as crises worsen
* They are looking at one- or two-year horizon
* Can accept social unrest if it doesn't end political
* Weak currency has economic positives as well as negatives
* Rise of inflation can be managed
By Andrew Torchia
DUBAI, Jan 9 A currency crisis, political
turmoil and an economic policy-making vacuum are not usually
favourable conditions for a stock market bull run but one is
underway in Egypt nonetheless.
The Egyptian market has soared over the last few weeks even
though the immediate political and economic outlook for the
country has darkened. Sustained buying by foreign funds has
helped to push up stocks.
The rally illustrates how many investors in countries hit by
the Arab Spring uprisings are looking beyond the current turmoil
to a point, perhaps a year or two from now, when politics may be
more stable and economies are again growing solidly.
Foreign investors are not ignoring Egypt's troubles but they
think the problems can be managed over time, so they are
focusing on the country's potential, said Sherif Salem,
portfolio manager at Abu Dhabi's Invest AD.
"Investors realise more and more with time that the
political and economic issues will follow a very volatile
trajectory, given the experience we have all been through over
the past two years," he said.
"But with the long term in focus, investors are looking
beyond the short- and medium terms."
The last several weeks have given investors plenty to worry
about. President Mohamed Mursi's decision to fast-track passage
of an Islamist-tinged constitution outraged the opposition and
may complicate efforts to reach a cross-party consensus on
These reforms are needed to persuade the International
Monetary Fund to provide a $4.8 billion loan to Egypt, to arrest
a slide in Cairo's foreign reserves. An IMF decision on the loan
was postponed indefinitely because of the political turmoil.
The precarious reserve position prompted Egypt's central
bank to abandon efforts to keep the Egyptian pound
steady. It launched a new system of foreign currency auctions
that has allowed the pound to depreciate over 4 percent since
Dec. 30, to a record low of 6.48 against the dollar.
More depreciation is likely; Capital Economics, a
London-based consultancy, thinks 7.5 would be fair value for the
pound. A weak currency threatens to trigger capital flight from
Egypt, saddle foreign investors with exchange losses and fuel
inflation that would worsen the country's political problems.
But such considerations have not hurt the stock market. The
main index is up about 25 percent from a low hit in
late November. It is still 18 percent below its level at the end
of 2010, just before the revolution which toppled Hosni Mubarak,
but up 64 percent from the post-revolution low of December 2011.
Non-Arab foreign investors, who account for around 15
percent of trading in the market, have been net buyers of stocks
on almost every day in the past six weeks, exchange data show.
Zin Bekkali, founder and chief executive of Silk Invest, an
emerging markets investment manager, said foreign funds were
gradually building back normal weightings in Egypt after
essentially pulling out during the chaos of 2011.
"Now global emerging market funds with small Egypt exposures
have generally gone back to neutral on Egypt. But regional-
focused funds are still in the process of doing so - this
process partly explains why the market has been so strong in the
last few weeks, and it could continue for some time," he said.
The uproar over the constitution has sparked some violent
street protests. But many fund managers can accept a fairly high
level of social unrest, as long as it does not seem to doom
Egypt's slow transition to more stable politics.
"You have to fight not to get preoccupied by the politics -
don't fall into that trap. It's difficult, but you have to
accept that volatility is part of the market," Bekkali said.
In one way, Mursi's aggressive move on the constitution
looked positive to some investors: it cleared the way for
parliamentary elections in a few months' time. The elections,
however messy, are a key part of the political transition.
Meanwhile, the economics of currency depreciation are not
totally negative. Foreign investors seem to be using the lower
pound to buy stocks at cheaper prices, while inflation caused by
currency weakness may erode the real returns of bank deposits,
forcing local investors into stocks over time, Salem said.
Shares in exporters such as Ezz Steel, which could
sell more abroad with a lower pound, and property developer Palm
Hills Developments, which could benefit if a cheap
pound encourages wealthy Gulf investors to buy Egyptian real
estate, have outperformed the market in the last few weeks.
The big danger for stocks is an uncontrolled collapse of the
pound which, because Egypt imports much of its food, could push
inflation to politically explosive levels.
But investors believe a collapse is unlikely, as they think
Egypt will eventually obtain the IMF loan while other foreign
donors such as Qatar, which this week announced $2.5 billion in
aid to Cairo, have a geopolitical interest in supporting Egypt.
Nancy Fahim, regional economist at Standard Chartered in
Dubai, said Cairo was likely to have enough reserves to manage
the pace of the pound's drop and limit the rise of inflation.
"I think they will avoid chaotic depreciation," she said,
predicting inflation would rise to 8.5 percent next fiscal year
from an average of 7.7 percent in the current year through June.
Last fiscal year, it was 8.7 percent.
Egyptian stocks have thrived alongside a weak currency in
the past; in 2003, when Cairo launched an earlier policy of
controlled depreciation, the pound fell about 25 percent but the
stock index shot up 135 percent as export-related shares soared.
Bekkali, whose company has about $25 million invested in the
Egyptian stock market, or roughly 20 percent of its regional
African and Arab equity investments, said stocks were trading at
around 10 times companies' estimated earnings for 2013, with
earnings expected to grow about 20 percent in the coming year.
"That would imply about 40 percent upside for the market
from its current level," he said.