In my research and investing I stress three things: people, structure and value. I look for companies that are controlled and managed by quality people, have corporate structures that align minority and majority shareholder interests and trade at valuations that are below fair value if not outright cheap. This post is about a recent trip to Cairo, Egypt and touches on people, structure and value – as well as lots more – in that country.
The purpose of the trip was to generate a short list of quality companies I’d like to own stock in if/when the currency is revalued. Egyptian equities appeared on my value screens back in March, but corporate responsibilities kept me tied to home.
I was also concerned that Egypt’s currency was going to be devalued. There was a large and growing gap between the official and black market rate. Russian stocks popped higher soon after their currency was floated in early December 2014, and I wanted to get my ducks in line in case the same thing happened in Egypt.
Readers are advised to note that it was my first time in Egypt as well as my first time in the Middle East. Most of what’s not referenced below comes from on-the-ground meetings rather than from verified sources. The people I met were mostly financial and corporate professionals, who are generally more conservative, educated and less willing to rock the boat.
Meet the New Boss. Same as the Old Boss?
One of my first impressions of Cairo was the heavy security presence on the way from the airport to my hotel. There were suited ‘undercover’ security men standing every 400 meters or so on the access road’s median strip and straight through the tony Heliopolis neighborhood. Toward the end of my trip I was politely told not to take pictures at a major intersection near my hotel by a serious, well-dressed man with a walkie-talkie.
Despite having one the world’s oldest continuous parliaments, the country has been basically under military control since the 1950s. Nasser, Sadat, Mubarak and now Sisi all come from the military. And this doesn’t seem likely to change. Nobody I talked to had anything positive to say about Morsi’s and the Muslim Brotherhood’s short stay, and there does not seem to be any other decent sized and well organized opposition. I was told that most Egyptians feel that the military provides welcomed stability in volatile region.
While nobody I met had anything good to say about Morsi and the Muslim Brotherhood’s brief government, I’m sure this view is not shared by all. Members of Hasm, reportedly a new group aligned with the Muslim Brotherhood, certainly don’t feel this way. They recently took time and effort away from more productive activities to bomb and kill six police who were stationed on the road leading to the pyramids (see here).
Much of the outward appearance of stability could be due to suppression of the press and dissidents. The government is not shy about keeping the press under control by jailing journalists, and some reports note that the present government is more repressive than previous ones (see here, here and here).
Foreign Exchange Nirvana
Virtually all discussions on the economy focused on the currency. Egypt imports a lot and virtually all trade is done in USD (United States Dollars). It’s one of the world’s largest wheat importers for instance.
Virtually every meeting with corporate executives began with a discussion of the currency – how they are sourcing dollars from the ‘parallel’ market, how much of the higher costs they can pass onto customers, and how and when the situation will end. All were adamant that the situation was unsustainable and had to change. None thought the change would come so quickly.
It happened when I was there which, for an emerging markets geek like me, made it a super exciting week!! So please forgive me if this section is a bit long-winded.
When I arrived on Sunday USD1 bought EGP8.88 at the official rate (EGP stands for Egyptian Pounds). However, the black market rate was EGP15, up from about EGP12 just a few months ago. This means that people who exchanged their USD to EGP on the black market could buy twice as much as if they exchanged their currency at the official rate.
It also means that companies that import raw materials, equipment and finished products needed twice as many EGP to buy the same thing when using the black market rate. Few non-government companies could get enough USD at the official exchange rate so they relied on the parallel market.
By Tuesday – just two days after I arrived – the black market rate shot up 20% to EGP18, before falling by 33% to EGP12 the next day (Wednesday). The dramatic one day fall foreshadowed the next day’s news that the currency was going to be set free (Thursday). It fell to EGP15 by the time I left (Saturday). It has declined further and, as this is being written, is trading a little over EGP18.
To put this in perspective, my daily breakfast at the Hilton cost EGP205. At the old official rate of EGP8.88 to one USD, my breakfast cost USD23.08. By the time I left it cost USD13.53, and at the current rate it cost USD11.39, or 50% less than it did at the old exchange rate. Not as cheap as I’d like, but certainly not as expensive as before.
After the change, prices in Egypt are not very expensive. In fact, after Ukraine it has the least expensive Big Macs in the world. At the hotel across the road from my hotel it cost EGP26, or about USD1.50 at current exchange rates. (Link to The Economist’s Big Mac index is here).
A quick stop at Carrefour confirmed this. A 1kg bag of pasta cost EGP10 (US$0.66), pre-cooked large salami pizza EGP22 (USD1.46), and a French baguette, EGP5.75 (US$0.38). This was a month ago and right after the devaluation, and with inflation expected at 25-40% next year, it’s unlikely they’ll stay so cheap.
Stocks on Sale Too
Another way to look at this is that all the stocks were at a 50% sale for USD investors on Thursday as compared to Wednesday. And who doesn’t like a sale?
Investors certainly do and have bought heavily with the headline stock index increasing some 30% in the month since the currency was freed.
For foreign investors there is an additional problem of getting your money out and into the currency you want. It’s easy to transfer USD into Egypt, but it may take a while to get it out as government approves all foreign currency outflows. There have been signs of this improving, and with the currency now freely exchangeable, theoretically there should not be any problems. However, governments everywhere are loath to give up power and fiddling with the currency exchange plumbing