Investing in the Arab Spring: Egypt

But with Egyptians set to elect representatives to draft a new constitution at the end of this month, investors are bullish about the country’s future.

The protracted struggle between protesters and supporters of ex-President Hosni Mubarak severely disrupted the Egyptian economy in the first quarter of this year, dropping 8.6% according to the Institute of International Finance. It has picked up since, however, and the IFF predicts an overall contraction of just 1.8% for 2011 overall.

There have been some high-profile concerns of Egyptian companies in the wake of the revolution. Citadel Capital, Egypt’s largest private equity group, instructed Citigroup before the summer to review strategic options including a sale.

It told Financial News in October of its new “defensive” strategy aimed at keeping the firm afloat amid the current political instability in the country, boosting its cash position with divestments from its portfolio and a new $175m rights issue. The company has also secured $150m debt facility from the US government agency, the Overseas Private Investment Corporation, as reported by Financial News today.

Egypt’s banks are also struggling under the weight of their large holdings of their government’s sovereign debt, with Moody’s, the rating agency, downgrading five of the country’s largest lenders, citing doubts about the systemic support available from the Egyptian government.

Fund managers therefore argue that it is critical to be patient in Egypt.

“After the revolution some people were overly optimistic that there would be a quick turnaround,” said Andrew Brudenell of HSBC Global Asset Management. However, in Egypt we like the long-term story.”

Egypt lacks natural resources, but it does have a strong position in terms of demography and geography.

Rami Sidani, head of Middle East and Africa at Schroders, said Egypt has the potential of being “the China of the Middle East and north Africa”.

“It is one of the few large emerging markets that genuinely remain in the early stages of development – and it’s one with all the ingredients to be a winner,” he said.

“There is a great opportunity there. Egypt has the potential to become the manufacturing centre of the region. It’s also hungry for capital, with a massive market.”

Brudenell added: “Egypt has a young and growing population, with a very entrepreneurial culture. They’ve also got good trade links with both the Middle East and Europe, a booming tourism industry, and a number of large industrial companies”.

Telecoms, infrastructure, real estate and the provision of financial services to Egypt’s under-banked population were particularly promising prospects, according to Brudenell. “There is a great opportunity to invest in these kinds of Egyptian firms which, sooner or later, will expand into other countries in the region.”

Sidani was also optimistic about that the hopes raised in Egypt by the Arab Spring would come to fruition – and bring back those investors who pulled their money out of the country following the turmoil of January.