Time to buy a “more stable” Egypt?

Egypt is back in the spotlight as an investment them, with analysts touting exposure and fund managers pouring money into the country.

These investors are betting that recently-elected president Abdel Fattah Al Sisi, a former military leader, will bring a new era of political and economic stability to the country that will boost returns in the shares of companies that do business there.

Cairo’s stock market has risen more than 60% since Sisi deposed Mohammed Morsi, Egypt’s first freely elected president, in a coup last summer.

Another sign that investors now love Egypt again: The first IPO of an Egyptian company since 2010 rolled out last month, Arabian Cement, and it was way oversubscribed.

Now that Sisi is slated to serve a term as president following a regular election (results were just announced) should you be getting exposure to Egypt?

I think you should take a pass. Sisi has some pretty big challenges in the huge government deficits, sluggish growth, and double digit unemployment which suggests the potential for social unrest lies just beneath the surface.

But that’s not the problem. Instead, I’m avoiding Egypt because these problems haven’t created enough fear. There’s simply not enough negativity in the investment theme for a contrarian investor like myself.

I liked Egypt a lot better back on January 30, 2011 when I suggested Brush Up on Stocks readers should buy WisdomTree Middle East Dividend (GULF) and Market Vectors Gulf States Index (MES) exchange traded funds, around the time when alarming social unrest in Egypt and elsewhere had most investors fleeing the region.

Here’s what I wrote about investing in Egypt on January 30, 2011:

I like it when people take to the streets. Not for the excitement, and certainly not for the violence. But because when people take to the streets there’s likely to be a market over reacting somewhere — exactly what I am always on the lookout for as a contrarian investor. So as a trade on a reduction in the social unrest in the region at some point, I’d suggest taking positions in GULF or MES, with a preference for GULF because it pays a 3.1% dividend yield — which may come in handy if this turns out to be a long trade. Please keep in mind that personally, I have a habit of being early to these kinds of trades.

I was early, but the contrarian bet has paid off nicely. GULF and MES have vastly outperformed the market since then.

* GULF is up 64.7% to $23.45 as of the June 2, 1014 close, from a dividend adjusted February 1, 2011 close of $14.24 (GULF has paid $2.41 a share in dividends since then).

* MES is up 64.3% to $35.04 from a dividend adjusted $21.33 ($1.95 in dividends).

* They are up 73% and 79.6% from the end of February, 2011.

In contrast, the S&P 500 ETF (SPY) is up 57.7% from February 1, 2011 and 54.9% from the end of February 2011, including dividends.


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