If the situation in Egypt and Tunisia over the past few weeks has roiled your fears of investing in the fast-growing African market, you might be missing the best time to get in.
In fact, you may have already missed it. Although it's too soon to tell what the Egyptian Stock Exchange will do when it reopens Sunday—especially following Mubarak's departure on Friday—mutual funds and ETFs that track regional markets in that part of the world haven't fared that badly. The WisdomTree Middle East Dividend fund (symbol: GULF) has only dropped about 5 percentage points since its mid-January high and has already regained some of that loss. And while the Market Vectors Africa Index ETF (AFK) fell 11 percentage points immediately following the crisis, it's now down just 6 percent as of Thursday trading.
So why aren't investors more worried about turmoil in this area of the world? For one, political crises often have short-lived effects on fast-growing frontier and emerging markets. "Back in 2007 after the Kenya elections, we saw some bloodshed in the streets," says Brian Dillon, institutional portfolio manager of the Eaton Vance Parametric Tax-Managed Emerging Markets fund (EITEX). "But from a financial perspective, you saw people fleeing the country economically. But then six months or so later, you saw people out looking for cheap assets … and you saw the country begin to pick back up."
About 20 percent of the fund's assets are dedicated to Africa and the Middle East, and Dillon says the firm won't reduce that exposure unless it's clear that shareholder rights are being reneged—something that doesn't seem likely in this case, he says.
Another reason investors aren't running for cover is that equity markets in this part of the world are not as interdependent as they are in the developed world, where something as mundane as American job reports regularly affect European markets. For instance, among Egypt's top import partners, Turkey is the only emerging economy in the top five and makes up less than 5 percent of imports, according to 2009 estimates in the CIA's World Factbook.
"There is very little trade between Northern and Sub-Saharan economies. Egypt has a lot of trade with Europe and the Middle East," says Larry Seruma, managing principal of the Nile Pan-Africa fund (NAFAX), which has investments in Egypt. "There is more correlation between the Egyptian stock market and the emerging markets as a whole [than with Africa], but in this particular case, what has happened is that Egypt has decoupled from that relationship with the emerging markets. The emerging markets have done much better than Egypt."
"Most investors tend to look at the Middle East and North Africa very separately from the Sub-Saharan countries," agrees Sebastian Spio-Garbrah, chief analyst of frontier markets for DaMina Advisors, a risk assessment firm with offices in Ghana and The United Arab Emirates among others.
What this means is that investors looking for a good entry point may have found it in the last week, realizing that realities in North Africa will likely have no effect on corporate earnings in the rest of the continent.
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"By and large, if you are an investor in the Middle East, you understand risk. You don't go investing in Saudi Arabia or in Egypt or in Algeria without understanding the risk of terrorism, the risk of political instability," says Spio-Garbrah. In other words, these markets draw fewer purely prospective investors, or so-called "dumb money," to begin with.
What's different now, he says, is that a regime change in Egypt could alter the country's relationship with the United States government, which until now has had a stabilizing effect on the Egyptian market by supplying the country with loans and guarantees. This added risk might scare investors further down the line.
So far it seems to be having the opposite effect, though. The Market Vectors Egypt Index ETF (EGPT), which initially lost 20 percent after Egyptians took to the streets, regained 12 of those percentage points by Thursday, and is selling at a 10 percent premium to its net asset value, which demonstrates investor enthusiasm. The sharp upturn in other regional markets this week emphasizes renewed investor excitement over reduced equity prices following the North African uprising.