"Sell Egypt"

As we noted in the previous post discussing the inevitable pre-civil war crack down on pro-Mrusi protesters, the only thing that matters, at least to the "developed" West, is how the overnight events in Cairo impact risk, i.e., markets and stocks. Moments ago we got the first take, courtesy of Noah Capital Markets. The conclusion: Sell Egypt.


From Noah Capital Markets

Summary: Sell Egypt after strong rally, short CBKD LI, OCI NA. Increasing push to eliminate MB as deaths could have been avoided.

EGX 30 down only , up 23% from end June lows, off only 1.5% today with death toll from the various pictures I’ve seen and people I’ve talked to at least 100.

We moved neutral Egypt on July 3rd (“Morsi too legit to quit”), since which the EGX30 is up 4% and our preferred picks Orascom Telecom (GDR) and Transglobe are up 16% and 7% respectively.

However, we now believe that things in Egypt have the strong potential of getting much worse, pushing through the positive aura that has comforted local investors hoping of a business-friendly environment and no MB in combination with pressured fundamentals.

The nature of this morning’s clearing was predictably disproportionate, with live ammunition deliberately used. It isn’t too tough to clear a square, as the Turks recently showed in the widely-condemned clearing of Taksim square, where the casualties were more accidental than anything (ie tear gas canister to the face). It is unlikely we will see the same opprobrium against Sisi et al as Islamists are intrinsically difficult to support given their beards and perception that supporting them means support for the more extreme elements too (even if given infant mortalities today from tear gas inhalation etc)

This clearly shows that the security forces had no problem provoking a confrontation and backlash that would allow them to suppress the MB once and for all, which fits with our view that the probability of their reintegration was minimal given all coups need to consolidate their position. This also fits in with the view of many secularists/liberals/revolutionaries in Egypt (even well-educated ones), who will say the army has no choice but to wipe out a portion of Egyptian society that they find revolting (ironic). State TV also calling on people to confront MB..

Going forward we will clearly see riots and likely an attempt by the MB to take Tahrir square as the only place they could legitimately say the MOI has no mandate to clear them from (!), but MB leaders are now all on the docket for arrest etc. The organised nature of the MB and their chunky presence in society (lets say 10%) means they can be far more disruptive than the 2011 revolutionaries, particularly given that tactics will switch to full-on civil disobedience and slowing the economy down with some extremist elements targeting the tourism industry. The increasing sectarianism (for want of a better word) on the street is likely to be very difficult for the security forces to handle, versus the relatively centralized and organised crowds in 2011.

Given the strong rallies in key names such as CIB, TMG, ETEL etc from the OCI cash recycling and current valuations, we believe the risk is clearly to the downside, particularly as EGP liquidity continues to improve, allowing a huge number of foreigners and yields come in, pressuring bank net interest margins.

For perspective of how bad it could get, the EGX 30 is up 57% from its end of 2011 low with the political situation even muddier than that point and a significant portion of the populace marginalized and increasingly angry.

I find it difficult to see a bull case that would take the index up 20% from here before EGP liquidity likely eases in the next few months (as otherwise Egypt will get kicked out of the MSCI), but would welcome any suggestions.

The currency is likely to remain stable given Gulf support, making T-bills a far more attractive option than equities, with Orascom Telecom now a bit too rich to be a safe hiding point. Those with Egypt in their index should move underweight here on the beta names such as COMI, TMG and ESRS.

For those that can, CBKD LI and OCI NA offer good shorting potential here at a relatively low cost, please contact for more details.

For the model portfolio we sell out of Orascom Telecom GDRs after their strong run, but maintain our position in Transglobe as fundamentally undervalued on a long-term basis with an adequate margin of safety. We substitute Bank Muscat for Orascom Telecom in our Top Picks.