R.I.P., Gamal Abdel Nasser




EGYPT IS HOT; we’re talking about stocks, not climate. Last year the Cairo Stock Exchange index climbed 40% in dollar terms; so far in 1997 it has jumped another 38%, even after factoring in some recent weakness.

This appreciation is from such a low base that Egypt, with a population of 63 million, is still one of the world’s cheapest emerging markets. It sells for 14 times earnings and yields 5%, according to Nicholas Horsley, portfolio co-manager for the Emerging Markets Fund at Warburg, Pincus Counsellors, Inc. Emerging markets in Asia and Latin America tend to trade at much higher multiples.

Even at current prices Egypt’s 600 publicly traded companies are worth only $17 billion in the aggregate;one of the world’s lowest ratios of market capitalization to population. Warren Buffett could purchase the whole lot.

Egypt’s politicians are finally getting serious about unshackling the country’s economy from its socialist past. Almost every Egyptian company of any size was seized by Gamal Abdel Nasser in 1961. For the next three decades the Cairo Stock Exchange’s trading floor literally served as a quiet cafe for a mere seven brokers. Now it has 107 traders glued to computers.

Under President Hosni Mubarak the government has begun to privatize much of what Nasser socialized. In a market-friendly gesture, insurance and pension restrictions may be dropped to permit stock investments. Egypt’s economy has been growing at about 5% after inflation, which has been declining since 1991 and now runs at about 6%. The country’s savings rate has climbed to a healthy 18% of GDP.;

Khaled Sobhy, vice president of Middle East operations at Sterling Grace Capital Management, recently invested more than $5 million in Egyptian stocks on behalf of brothers John Grace and Oliver Grace Jr., after two years of research. What made them jump? The privatization last May of a big Cairo real estate development company.

Word in Cairo was the government would sell 10% of its holding to the public and 10% to employees, but in the end 75% was privatized. “That showed the government is finally serious about ceasing to be an obstruction,” says Sobhy.

Of the more than 600 publicly traded Egyptian companies, only 50 or so trade actively enough to merit serious attention from international investors. Several of these are in the banking, real estate and food industries. These are old businesses in industrialized nations but infant industries in developing lands.

“As the Egyptians get richer, they want better food and houses,” says Warburg, Pincus’ Horsley. “As soon as they can afford to, they buy.”

Foreigners like ING Barings’ Angus Blair have been buying shares in North Cairo Flour Mills and Tourah Cement. The former sells for scarcely half the earnings multiple of General Mills, but is growing much faster. Tourah Cement has been upgrading kilns and increasing production. The company’s market capitalization is $643 million, and it trades at 13 times expected 1997 earnings.

“Demand is booming [from] the construction of roads, apartments and hotels along the Red Sea;we won’t see a slowdown for years,” says Aly El-Tahry, managing director of investment banking at EFG-Hermes in Cairo.

Another favorite among the foreigners: $2 billion (1995 assets) Commercial International Bank. The company earns over 20% on equity and 3% on assets, yet trades for 15 times estimated 1997 earnings;very reasonable for a bank posting such returns.

Here’s a sign that the runup in Cairo hasn’t peaked: Wall Street has not yet issued an Egyptian country fund. Three offshore offerings do exist: the Egypt Investment Co. and Lazard Frères’ Egypt Trust, both traded in London, and EFG-Hermes’ Egypt Fund, listed in Dublin. In the U.S., one-third of the $54 million Foreign & Colonial Emerging Middle East closed-end fund is in Egyptian stocks. Or be brave. Foreigners can buy Egyption securities directly, without restrictions.

Juliette Rossant

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