Egypt ‘contagion’ unlikely in sub-Saharan Africa

Though some Middle East and North Africa (MENA) equity markets fell at times by 20% or more following popular unrest in Tunisia and Egypt, there is a relatively low risk of ‘Egyptian contagion’ affecting equity values in sub-Saharan Africa.

The positive view comes from Botswana-registered Imara, a merchant banking and investment management group.

John Legat, head of Imara’s asset management division, notes: “Sub-Saharan markets, excluding South Africa, generally have low correlation with one another and with the major international economies.

“Political risk has always had to be taken into account in Egypt. In the past this factor may have been under-estimated by some investors.

“This underlines the advisability of position-taking in a range of markets when creating a general portfolio with an African focus.”

MENA markets saw substantial falls after 25 January when Tunisia’s ‘Jasmine Revolution’ unseated President Ben Ali. The Egyptian stock exchange was closed on January 30. The Cairo market fell 21% before share-trading was suspended.

Imara sees the 500,000 strong Egyptian military as the key factor in unfolding events and believes it could take on a similar role to the Turkish Army, which for many years has assured a continuation of the secular Turkish state.

Legat adds: “Egypt’s reform programme has been underway for many years; hence, good growth rates, low inflation and a positive environment for corporates. Foreign investors have therefore been heavy investors into the Egyptian Stock Exchange. As a result, they account for large sections of the free floats of a number of listed companies.

“Apart from a possible devaluation of the Egyptian pound, it is not obvious what else a post-Mubarak Government would do. If nothing changes, apart from the man at the top, then Egyptian shares are 25% cheaper than a month ago. But the ultimate risk – that of an Islamic uprising one day – would still be there, only this time more foreign investors appreciate how big a concern this is.”

Recent events had also focused investor attention on some structural concerns – that the risk premium in Egyptian valuations had in the past been too low and that the institutional investor base in Egypt was too small to absorb any foreign selling.

Concerns about market performance in the coming weeks tend to centre on MENA rather than sub-Saharan Africa, says Imara.

Legat explains: “We fear the suspension of both the Egyptian and the Tunisian stock markets in recent weeks will put pressure on the MENA asset class and hence foreign selling may dampen any bounce-back after such a large and sharp fall. The economic implications for Egyptian companies meanwhile remain unknown. Elsewhere in Africa, all is well.”