February 4, 2011

Egypt Economic Analysis: View From PIMCO, J.P. Morgan Funds and More

Foreign ETFs and mutual funds see action, but biggest impact is still in-country

Global market players are closely watching the uprising in Egypt to see if events there have an impact on their investments in stocks, corporate bonds and sovereign debt.

The Van Eck MarketVectors Egypt Index ETF (EGPT) moved up 1% on Friday to trade near $18. Earlier this week, EPFR Global said emerging-stock stock fund outflows reached their highest level in three years, hitting more than $7 billion in the week ended Wednesday. According to Lipper data released Thursday, foreign stock funds, both ETFs and mutual funds, had about $4 billion in outflows for the week.

So far, though, the uprising’s most obvious financial effect has been on Egypt itself. The Egyptian economy has lost at least $3.1 billion as a result of the political crisis in the country, at a cost of $310 million per day, The Associated Press reported Friday as tens of thousands of protesters massed in downtown Cairo demanding the ouster of President Hosni Mubarak.

Citing a Credit Agricole report, the AP said the French investment bank has revised down its forecast for 2011 GDP growth to 3.7% from 5.3% and the Egyptian pound could see a depreciation of up to 20%.

"The economy is at the heart of Egypt's problems," John Sfakianakis, chief economist at the Riyadh-based Banque Saudi Fransi-Credit Agricole Group, said in the report.

Plenty of other market watchers are weighing in on the situation, publishing analyst notes and adjusting asset allocations to calm investor fears. Here is a roundup of what advisors, economists and portfolio managers are saying about Egypt:

PIMCO CEO and co-CIO Mohammed El-Erian: “The Egypt of tomorrow will not be the Egypt of eight days ago. The genie is out of the bottle … People have been empowered,” El-Erian told  Bloomberg on Tuesday about the situation in Egypt. El-Erian, who speaks Arabic and is the son of an Egyptian diplomat, described the country — now in its second week of political protests — as “certainly [moving] on to something new.” Still, “Egypt is not defenseless in terms of its economy,” El-Erian said. “It’s financially very strong.” The country’s economy, he noted, is free of external debt and has some $35 billion in reserves.

J.P. Morgan Funds Market Strategist Joseph Tanious: “In 1974, while in their early 20s, my parents picked up and left their native country of Egypt for North America. Having grown tired of Egypt’s corrupt political system and religious oppression, they left their friends and family, along with everything they had, in the hopes of creating a better life for their future family. Four years after that, I was born. Watching the events of the past week unfold in Egypt evokes mixed emotions for all Egyptians, both those living in Egypt and abroad. Over the past few days, I’ve reached out to several relatives living in Egypt, and despite Internet and cellphone service being shut down, I was able to connect with them.

"While it seems clear that Mubarak’s rule will soon come to an end, the bigger question is what happens next?....The U.S., in a tough political spot, obviously wants to encourage democracy, yet has been dependent on the Mubarak administration to provide some stability in an always volatile Middle East region. America has also paid for this stability, providing Egypt with nearly $2 billion in military and economic aid. However, if stability turns to instability, what does it mean for the global economy? The first concern is the production and distribution of oil. Here the direct effects should be relatively minor. Egypt is not a significant oil producer, ranking only 29th in the world in oil production. Nor is the Suez Canal that crucial a trade route for oil, as it is too narrow for the largest supertankers.”

RBC Capital Markets Chief U.S. Economist Tom Porcell, commenting on the decline in RBC’s U.S. consumer confidence index in February to 44.5, down 0.4 points from January’s 44.9:“Although the RBC Consumer Outlook Index has done nothing but move sideways since hitting a post-recession high in December, it’s surprising that consumer confidence didn’t fall even more, given recent events. The survey was conducted in the midst of daily headlines about unrest in Egypt, rising fuel prices and a sharp decline in the markets – all of which historically weigh on confidence. It appears that the index was backstopped by future expectations, which reached their highest level in a year. This suggests that consumers view current events as transitory and are willing to look past them.”

CEO Frank Fantozzi of Cleveland-based wealth management firm Planned Financial Services: "The global markets have a domino effect, and as an advisor you have to look two or three steps ahead. Egypt right now is not going to have any major effect on oil prices that is going to send a ripple effect through the economy and portfolios. But the geopolitical risk is that if the Middle East stabilizes and you see a huge spike in oil, similar to what we saw in 2008 when oil was $125 a barrel, which would create a drag on our GDP.

"I don’t think that is going to happen, but it’s an underlying risk. In terms of inflation, because oil and commodities go hand in hand with inflation, we feel that by increasing our exposure across the equity lines, especially in emerging markets, investors will pick up that gain as commodities and emerging markets increase, and of course oil is one of those commodities."

Rogerscasey’s Adam Tosh, Managing Director, Investment Solutions: “From a portfolio allocation/performance context, Egypt’s effect alone is relatively small. The primary risks from Egyptian unrest are political contagion within the Middle East and North Africa and its impact on the world economy if the Suez Canal were to close, suspending shipping and trade. These concerns highlight the need for country re-ranking, sovereign risk calibration, and currency analysis. A general emerging market hiccup sparked by Egypt may allow longer-term investors a better entry point into these markets.”

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