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International
Sunday, February 13, 2011
INVESTORS SEE CHANCES IN POST-MUBARAK EGYPT NILE CAPITAL'S SERUMA BETS ON 'MORE ECONOMIC GROWTH' * RESIGNATION TO HALT OUTFLOWS, SUPPORT DOMESTIC MARKET * VAN ECK MARKET EGYPT ETF SETS DAILY VOLUME RECORD
T
he end of Hosni Mubarak's rule in Egypt on Friday should bring opportunities for investors as freer markets and increased commerce gradually take root in a country with 80 million people hungry to become part of the global economy. Mubarak relinquished power to the military 18 days after an uprising led by a technologically savvy young population demanding jobs, freedoms and transparency. Despite the political uncertainty of what lies ahead in the short-term, investors see the Egyptian "White Revolution," as many citizens are calling it, an opportunity to grab market-share in the region's most populous country. "There will be democracy and transparency and these changes will lead to more economic growth," said Larry Seruma, managing principal at Nile Capital Management. "It's a great opportunity to invest in Egypt." Prior to the revolution, Nile Capital's exposure to Egypt was 5 to 10 percent of its $4.79 million portfolio. Under the 30-year rule of Mubarak, Egypt had been a critical ally of the United States and the main stability force in the Middle East. But now that his rule is over, many worry that a power vacuum could lead to a new regime that will oppose Western capitalism and be antagonistic toward Israel, the main U.S. ally in the region. The outcome is yet to be seen. But government officials and investors in general, as well as the majority of Egyptians, are hopeful for a more open government and market. "I think investment in Egypt itself could increase, say, a year from now as a new
government comes in. If that government ends up being democratic in nature, then you could certainly see some improvement," said Bryant Evans, investment advisor and portfolio manager at Cozad Asset Management, in Champaign, Illinois. Even the most powerful and wealthy businessmen in Egypt have been beating the drums of democracy and free markets as the best form of insurance for their investments. "When you have less than, say, 10 percent of the population with checking accounts, there is potential for growth," said Karim Baghdady, managing director of Egyptian-based investment bank Beltone in New York. "When you have a gray economy that is almost as large as the official GDP, if you are able to institutionalize that economy, then people will start securitizing their debts, able to borrow more, buy more. So there is a big domino effect." Egyptian assets make up just a fraction of global emerging market funds, and the economy accounts for just about 0.3 percent of the MSCI emerging market index. The Van Eck Market Vectors Egypt index exchange-traded fund rallied after Mubarak's resignation and set a daily volume record. It was last up 4.8 percent at $18.66. Overall, emerging market equities have come under selling pressure due not only to Egypt's political ructions, but also on profit-taking from 2-1/2 year high benchmark indices. Investors have pulled a net $6.27 billion from emerging market equity funds in the last three weeks, according to data from Lipper, a Thomson Reutersservice. However, when factoring the market price movements on the stocks, the assets under
management in U.S.-domiciled funds are down $10.92 billion, or 5.6 percent since the week ended Jan. 26. Yet this is seen by some dedicated investors as an opportunity. "I have kept my 'hold' on Egypt. I didn't have a 'sell' through this crisis. Nothing that happened today has changed my fundamental view that the outcome will be a good one," said Gabriel Sterne, senior economist at London-based Exotix, a brokerage catering to frontier market investors. In the fixed income space, one fund manager said Egypt's U.S. dollardenominated sovereign bonds have recovered a good portion of lost ground, but is still not convinced the debt issues are a bargain. "I think people realize there was a panic in the bonds and short positions had to be covered, while a potentially more peaceful resolution to the protests, with limited escalation of violence, added to some relief buying," said Jeff Grills, co-head of emerging market debt portfolios at hedge fund Gramercy in Greenwich, Connecticut. The Egyptian pound had been falling steadily since political protests broke out on Jan 25. By Thursday, it traded at 5.887 to the U.S. dollar, marginally lower than Wednesday's close of 5.8775 but stronger than the six-year low of 5.960 reached before the central bank intervention on Tuesday. The stock exchange has been shut after countrywide political protests caused the benchmark index to plunge 16 percent in two days, and analysts have warned of a renewed sell-off when trading resumes, most likely on Sunday.
The regulator said on Tuesday the exchange would suspend trade for a half hour if its broad 100-share index declined by 5 percent, and for longer if it fell by 10 percent. The cost of insuring Egyptian sovereign debt against default or restructuring for five years fell 25 basis to 315 bps after Mubarak's Friday announcement, compared with 380 bps earlier in the day and 340 bps at Thursday's close, data monitor Markit said. They traded around 240 basis points before the start of the year.
Meanwhile, the euphoria on the streets of Cairo is fresh, the uncertainty high and the excitement for a better future palpable. "The new government, whatever shape it takes, will be incentivized to provide work for a greater portion of the population to get them above the poverty line. There has been a lot of foreign investment to give it up. If anything, the economy will grow," said David Grayson, managing director of emerging markets brokerage firm Auerbach Grayson in New York.-Reuters
US finding on Toyota cuts automakers a break T
he U.S. acquittal of Toyota Motor Corp's electronics in cases of unintended acceleration will slow momentum for new safety measures involving brakes, ignition switches and data recorders. Transportation Secretary Ray LaHood's pronouncement Tuesday that Toyota vehicles "are safe to drive" and election gains by regulation-skeptical Republicans puts the additional safety measures in the slow lane. "The window was there in terms of momentum, but now I think it's closed," said one representative of a major automaker involved in regulatory matters. A 10-month study vindicated Toyota's position that it had identified and fixed the only known safety problems by focusing on mechanical issues with accelerator pedals and the risk that floor-
mats could trap the pedal in the open position. Although the U.S. Transportation Department said enough concern was raised during the saga for it to consider new safety mandates, it could take the rest of the year to decide whether to propose changes. A longer timeline allows industry to gradually incorporate software, mechanical and design changes on their own technical and cost terms, and try to get out in front of any government requirements. "They're proactive when they see an issue," Bruce Harrison, an analyst with IHS Global Insight, said of the auto industry. He added that the Toyota fallout could prompt carmakers to step up their attention in some safety areas. One of the measures mentioned by LaHood on
Tuesday, making sure braking overrides any throttle
inputs, is already being widely implemented by automak-
ers. But
some
automakers,
mainly from Europe, have expressed privacy concerns over U.S. regulatory overtures to expand information captured by onboard data recorders. Industry insiders say auto regulations normally take years to finalize and think the Obama administration will move slowly, given its desire to appear more business friendly and dispel the notion that it over-regulates. "They'll be cautious. They have to build a case for the rule," said Mike Stanton, president of the Association of Global Automakers trade group that includes Toyota as a member. A divided Congress is likely to deadlock over any legislative approach to imposing safety technologies. A bill last year that would have mandated brake override, imposed sharply higher
fines and set new corporate disclosure requirements, stalled in the run-up to the November elections where Republicans won control of the House and reduced the Democrat's majority in the Senate. Toyota headlines from early last year about its massive recalls and runaway vehicles had faded by spring - even though damage to its reputation was evident in U.S. sales results. The initial urgency for action by Democrats could not be sustained through summer with political change in the wind and a regulatory chill settling over the Capitol. "Dealing with a new Congress is a challenge and all these safety issues require bipartisan support," said Jackie Gillan, vice president of Advocates for Highway and Auto Safety. -Reuters
India's railways puff slowly to private sector reform
T
entative reforms and some eye-catching projects could herald a private sector-driven shake-up of India's creaking railways, but deeper change is needed to tackle the supply bottlenecks that still crimp growth. Once seen as a shining legacy of the British Raj and still one of the world's biggest employers, India's rail network crams 18 million people a day on to its ageing trains running from the foothills of the Himalayas to the southern beaches of Kerala. Decades of low investment and policy stagnation mean India has fallen far behind emerging market peer China in building a network fit for Asia's third-largest economy. Contrasts abound. While Indian trains are notorious for 24-hour delays, China has made a global splash with a train whose top speed of 486 km/h will halve the travel time for the 1,318 km (819 mile)
journey from Beijing to Shanghai to less than five hours by June. "The Indian Railways is at an infancy as far as the reform and privatisation process goes," said Ranveer Sharma, principal at Eredene Capital , a London-listed private equity investor in Indian ports and logistics. There are some signs of change. The Indian government has initiated multi-billion dollar projects including a $90 billion freight corridor to connect Delhi and Mumbai, with world-class industrial and commercial hubs to be built alongside. Backed by funds from the Japan Bank for International Cooperation and the Sumitomo Mitsui Banking Corporation, officials say the track will cross six states and benefit 180 million people, three times the population of Britain. A second giant freight line to the east will likely be backed
by the World Bank. The private sector is moreover flexing its muscle with inner city metro rail projects that have been snapped up by big-hitting domestic firms such as Reliance Infrastructure Ltd and Larsen & Toubro . "There are encouraging signs," said S. Nandakumar, a Chennai-based infrastructure specialist at Fitch Ratings. "If you look at it on a timescale of where we were say six or seven years ago, there's definitely a lot more activity in the rail sector in terms of expanding infrastructure, in terms of involving the private sector. "On the flipside, in comparison with what we've achieved on initiatives in some of the other sectors, it's a little short." A world away from the country's gleaming new airports, trains teem with rural migrants and hawkers left behind by India's near double-digit growth story. More than 80
percent of the network was built before independence from Britain in 1947. New Delhi has given a big push to infrastructure spending with a planned splurge of $1.5 trillion over 10 years. Railways could end up a laggard as the network receives 5 percent of funds from private money, the lowest figure of any major infra sector, though it takes $20 billion in traffic receipts a year. NEW DESTINATION? The railway ministry has talked up the need for tapping the private sector for funds and in mid-2010 launched two policies to open up freight traffic to private firms. The Private Freight Terminals (PFT) scheme lets private operators build and operate terminals on private land for a duration of 30 years and charge third parties for handling freight, boosting, for example, the business potential of ports and logistics firms.
Another initiative by the ministry was to let private firms run freight trains for certain commodities. "Privatisation of the container trains and the recent PFT policy are perhaps the first seeds sown by the government towards substantial privatisation over the medium- to longterm," said Eredene Capital's Sharma. "Foreign private equity investors, including Eredene, remain keenly interested in such developments." India's infrastructure is a study in contradictions, with showcase projects such as Delhi's revamped airport and a swish sea-link in the financial capital Mumbai set against road and power projects held up for years by red tape and funding gaps. Projects such as the DelhiMumbai freight line are a statement of intent that India's railway sector is playing catchup with the likes of China,
although the projects have proceeded slowly. India needs such projects urgently to ease its expensive, inefficient and polluting reliance on road transport to move around freight, which has in turn fuelled soaring food prices. British private-equity firm 3i Group Plc , which has a major presence in India, may expand its investment to include railways in a $1.5 billion infra fund to be rolled out in 2011. "There is investment required in railways, so for example some of the new ports that are being developed need additional rail links," said Michael Queen, the chief executive of 3i. "And of course, from an environmental perspective, moving cargoes like coal or iron ore is much more environmentally friendly doing it on railways rather than trucking it or building power plants in environmentally sensitive
areas." A lot more could be done. India's powerful Planning Commission, whose de facto head carries ministerial rank and is close to the prime minister, panned the railway ministry's "lack of clear long term vision" in a 2010 report and urged private sector-driven reforms. The panel recommended greater private participation in building world-class train stations and logistics parks, faster building of dedicated freight lines as in Delhi-Mumbai and "rebalancing" heavily subsidised passenger tariffs. Successive governments have ring-fenced the railways ministry as a gift to an ally. Prime Minister Manmohan Singh has handed the reins to Mamata Banerjee, the head of the Trinamool Congress party whose first priority is to win control of her home state of West Bengal in state elections due by May. -Reuters