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Jeff Opdyke is the Executive Editor at The Sovereign Society. Jeff has been investing directly in the international markets since 1995, making him one of the true pioneers of foreign trading. His passion is finding the renegade plays “on the ground” in overseas markets, and uncovering those... More
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  • Egypt's Riots: The Overlooked Truth 0 comments
    Jul 11, 2014 1:30 PM

    Editor's Note: This articles is the fourth in our "Best of Sovereign Investor Daily" series. It was originally published on September 17, 2012.

    About a week ago, 49 representatives of companies such as Boeing, Coca-Cola, ExxonMobil, Google, Oracle, PepsiCo and Microsoft made a trip to the Middle East. They're all interested in investing in what I consider to the country with one of the most promising emerging markets … though I know many will see it as scary, at best.

    The gaggle of companies had a face-to-face meeting with government leaders to discuss the business and investment environment. And they were happy with what they heard. The government spoke of an "economic overhaul" consisting of more free-market policies to attract foreign investors.

    The mainstream media, biased towards sensationalism, disasters and bad news in general, is too busy reporting on the country's riots and ongoing political turmoil, so very likely this is the first time you're hearing about this story.

    As an investor, you're almost always better off ignoring the media and focusing on the underlying fundamentals a country or a company has to offer. And in this case, the opportunities hiding beneath all the negative coverage are big.

    The Most Promising Country in the Middle East

    If you've watched TV news this past week, I'm sure you saw the images of protestors - who allegedly were angered by an anti-Islam video produced in the U.S. - climbing the walls of the U.S. Embassy in Cairo and burning the American flag. Such images help reinforce the overall perception that Egypt is just too unstable for investors.

    You would have to be crazy to invest over there, right?

    But here's a shocker: Egypt is the best performing stock market so far this year.

    I'm not surprised. I've long viewed Egypt as one of the most opportunistic countries to put money to work. The place is packed with a growing base of emerging consumers whose incomes are rising. And it's loaded with companies that are serving not just the locals, but also various markets across North Africa and the Middle East.

    I've put some of my own money to work in Egypt, opening a brokerage account in Cairo several years ago that's now stuffed with companies in plastics, telecom, dairy, finance and oilfield services.

    Far from a no-go zone, I see Egypt as a fantastic country to place a small bet on a brighter future. Those who invest in Egyptian markets today - and who have the willpower to ignore the day-to-day news events - will see meaningful returns over the long term.

    One of the ways you can measure the potential of emerging consumers is by looking at the country's GDP per capita - the gross domestic product divided by the number of people in the country.

    The lower the GDP per capita, the lower the standard of living. But the flipside to a lower standard of living is the higher-than-average growth in the consumer sectors as the middle class emerges … and that's the sweet spot in what I call "demographic investing."

    In terms of GDP per capita, Egypt ranks behind markets like China, Peru, Colombia and even El Salvador. Its GDP per capita is equivalent to 13% of the U.S. standard and 29% of the world's average.

    In other words, Egypt is relatively poor, but with tremendous growth potential.

    In fact, its GDP per capita has already grown by nearly 60% in the past decade, as you can see in the chart below. I expect this trend to continue.

    That's a beautiful trend. It's exactly what you look for as an investor in emerging and frontier markets. Hook into one of these trends, pick the right consumer stocks, and you can really fire up a portfolio's returns over time.

    Best of all, Egypt has great demographics underlying that trend line. With 80 million people, it's the largest population in the Middle East by far, and more than 60% of that population is currently under the age of 30. This young population will be a driving force for economic growth in the coming years as economic reforms begin to move the country onto a better path.

    Now is the Time to Buy

    No doubt that 2011 - the year of the Arab Spring - was tough for Egypt. The revolt ousted President Hosni Mubarak after a three-decade reign, and the Egyptian stock market tumbled 55%. The country saw an exodus of capital, as investors flew away.

    I flew in. I sent more dollars into my Egyptian account last year to snap up companies trading at ridiculous valuations - like a leading dairy company at less than 10 times earnings and growing those earnings at 15% or more each year.

    Since the new and freely elected president took office, life and the economy have been slowly improving. The new leader's message is that Egypt is now open for business. He views foreign investment as a key pillar to promote economic growth.

    The U.S. has pledged a $1 billion debt relief package. And the country is working with the International Monetary Fund to get a $4.8 billion loan by the end of November. Qatar has also pledged $18 billion of investments in the county. As a result, investor confidence is on the rise.

    Of course, like in any other major political transition, the country still faces lots of challenges. But I believe in three to five years Egypt will be a much more stable place to invest and will have a stronger economy. By then, though, Egypt's stock market will be markedly higher than it is today.

    Before the recent change of regime, Egypt had been growing at a steady 5%-6% per year for the past few years. That's the kind of growth you can expect when things stabilize. The time to buy is now.

    Though Egypt isn't the easiest market to trade for Americans who don't have an account in Cairo, you will find that some very good Egyptian companies trade as global depositary receipts, or GDRs, in London. One I'm particularly fond of is Orascom Telecom (London: OTLD), one of the largest mobile phone companies in the Middle East and North Africa. The company's footprint covers 415 million people in places like Egypt, Pakistan, Algeria and Bangladesh.

    Mobile phone penetration in those markets is a combined 48%, meaning Orascom has tremendous growth potential as emerging consumers in those markets increasingly move into a cellular world. The company has faced concerns that Algeria will nationalize the service Orascom owns, but those fears appear to be fading, which, in turn, could serve as a catalyst to push the shares higher.

    Orascom shares, which are priced in U.S. dollars despite trading on the London exchange, are a buy up to $3.25.

    Despite the massive rally this year, the Egyptian market is still trading on a price-to-earnings ratio of just 8, a discount of 30% to the broad MSCI Emerging Markets Index. Although the market has already risen by more than 50% this year, it still has to climb another 30% just to reach the level it was trading at before the political turmoil.

    My advice to you is this: Turn off the TV and invest in Egyptian markets today while they're still cheap.

    Until next time, stay Sovereign…

    Editor's Note: Egypt has continued to see its fair share of violence and upheaval since I originally wrote this article, but it has not stopped Orascom Telecom (now trading under the symbol of OTMT on the London Stock Exchange). The security has doubled in price in less than two years. No, the stock didn't climb in a straight line higher, but trading overseas in volatile markets requires patience and thorough research. The key thing to remember is that while most investors are grabbing their cash and running for the exits at the first sign of turmoil, you need to consider stepping in. Those moments are great investing opportunities, because stock valuations have been hammered to ridiculously low levels. At the end of the day, when politicians are done playing musical chairs for power, people still need to eat, go to work and pay their bills. Life will go on. And the companies that were hit hardest when investors fled and the companies that will rebound in a big way.

    Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.

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