World’s Deepest Devaluation Makes Egypt Assets RenCap’s Top Pick

CAIRO (Capital Markets in Africa) – Egypt is reaping the rewards of a painful devaluation. The plunge that sent its currency tumbling the most in the world over the past six months has made the nation’s assets among Renaissance Capital Ltd.’s top picks in developing nations. The Egyptian pound is now the cheapest of all emerging-market and African currencies after it scrapped controls in November, the investment bank’s real effective exchange rate model shows.

The weaker currency should spur exports and encourage foreign direct investment over the next few years, according to Charles Robertson, RenCap’s London-based global chief economist.

“Egypt is one of the most interesting stories in emerging markets right now for any investor anywhere,” he said on Monday in an interview in Cape Town. “There is an investment opportunity in Egypt now that’s as good as it was in South Africa when the rand was 16 to the dollar a year ago.”

The nation allowed its currency to float to tempt foreigners back to Egyptian markets and alleviate a dollar shortage that has crippled the economy. The North African country in February was said to have cleared the backlog of investors seeking to repatriate funds, which had been one of the reasons why money managers steered clear of Egyptian assets.

Should investors be concerned about Egypt’s risks?

• “It’s the most risky country in emerging markets to invest in in terms of regime change, along with Thailand. But President Abdel-Fattah El-Sisi is not likely to anoint himself as king forever.”
• “What’s more likely, if there is change, is it becomes a little bit more like a Turkey or a Russia or a Malaysia, where Parliamentary elections do happen, more parties can compete in them, but it’s not full democracy.”
• “The question is: is it in the price? When you have got the cheapest currency in emerging markets, or Africa, I think it is very much in the price.”

What other investment opportunities do you see in Africa?

• “The ones that are interesting are Ghana after the election of a new pro-reform government in December, and Ivory Coast, with the caveat that they have had a few army mutinies and that is putting some fiscal pressure on the country right now.”
• “And potentially Zambia, but that’s not without its problems. It has come up quite a lot since the copper price rose. And then there are places like Rwanda, which continue to be interesting to us.”
• “Morocco is an expensive market, but the macro picture is very, very good.”

What about South Africa?

• “Our fair value for the rand, based on our real effective exchange rate mechanism model, is 12.30 to the U.S. dollar. I struggle to get excited about that currency when it’s at fair value, given the change in finance minister that we’ve had, given the downgrade from investment grade, given the likely further downgrade from Moody’s Investors Service, which is coming.”
• “South Africa is not going to get a rating upgrade for a good few years. I wouldn’t be adding to positions in South Africa at 12.80 rand to the dollar, given what’s happened.”
• “The difficulty for South Africa is that while the numbers are not all that bad, it’s that over the last 20 years, they haven’t improved.”
• “But I’m more confident about South Africa than I am about Turkey.”

And Nigeria?

• “It’s become interesting again in Nigeria. It all changed on Friday night because the central bank produced a new foreign exchange rate for investors. This investment rate seems to allow the currency to trade within a few percent of the parallel rate. It seems investors will be able to bring money in as take money out at that rate.”
• “Up until now you have been bringing money in at a rate of 315 naira to the dollar and you have been struggling to get any money out at all. Around 370 to the dollar is a reasonable rate to put money in.”