Egypt's stock market has jumped 37 per cent so far in 2012, the largest gain of any country, but top U.S. fund managers focused on the region remain wary of further political turmoil and currency weakness in the most populous Arab nation.
The country's main stock index lost nearly half its value last year as massive public protests drove longtime president Hosni Mubarak from power in February 2011 and military leaders assumed control.
This year's stock market bounce came as investors snapped up shares of companies like Orascom Construction Industries SAE and telecom carrier Mobinil.
But in recent interviews, several fund managers who most closely follow the nation said significant risks from Egypt's political and economic situation remained.
Egypt's fragmented political parties are struggling to reach consensus on a new constitution and tensions are rising with a president election just two months away.
A major risk is the country's currency, the Egyptian pound, which several fund managers said could fall in value despite heavy government spending to prop it up.
"Yes, we're bottom-up investors and we want to buy the stocks; but the economic politics are so uncertain you could lose half your money just on the currency," said Oliver Bell, portfolio manager for T. Rowe Price Group Inc's Africa & Middle East Fund.
Bell, who oversees about $300 million in the fund, has mostly kept it out of Egypt since joining T. Rowe in October of last year. His fund is up 11.97 per cent so far this year.
Famed emerging markets investor Mark Mobius slightly trimmed his Egyptian holdings in the fourth quarter of 2011 in his Templeton Frontier Markets Fund . The fund is up 14.05 per cent this year.
Mobius said while he is optimistic about Egypt's long-term outlook, further political struggles could hurt stock prices in the interim.
"The trend towards political liberalization will have a positive impact on equity markets and markets in general," he said via e-mail. "Of course, in the interim there will be turmoil and uncertainty, but at the end the impact will be positive on markets," Mobius said.
Another manager of a fund with interests in the region, Adam Kutas of Fidelity Investment's Emerging Europe, Middle East, Africa Fund, said he is currently avoiding Egyptian stocks completely. Noting that Egypt imports much of its food, Kutas said inflation is one of his major concerns.
"The value isn't there," Kutas said, citing the recent run-up. "You're not being compensated for all the risks." The Fidelity fund has gained 16.22 per cent so far this year.
With investors willing to take on risks and with go-anywhere mandates, frontier fund managers like Mobius, Kutas and Bell have wide latitude to judge global events and trends and spend much of their time traveling.
Kutas spoke by telephone from Krakow, Poland, where he had gone to check on several mid-sized companies; Bell spoke from his base in London, just before getting on a flight to South Africa, where he has moved much of his portfolio.
Egypt has drawn much interest because of its fast-growing population, now about 80 million, and large domestic economy. The country's gross domestic product of $515 billion last year was second only to that of oil-rich Saudi Arabia among Arab countries.
Egypt's 37 per cent stock market gain through 26 March was the best of any country's individual equity market according to index provider MSCI Inc . Next best was tiny Kazakhstan, with a 32 per cent gain, followed by Vietnam, which rose 29 per cent, and Hungary, which gained 28 per cent.
Instead of jumping on Egyptian equities, T. Rowe's Bell said in the Mideast, he prefers to own shares of banks and other companies in Saudi Arabia.
He had owned shares in Orascom traded on the Cairo exchange, but has since moved to own them via the London exchange, in case a future Egyptian government puts currency controls in place as a crisis measure.
"You have political paralysis. It should be ended by the end of June, but meanwhile the economic clock is running down," Bell said.
Mobius's Templeton Frontier Markets Fund owned about 1.79 million global depository receipts, or GDRs, of Orascom Telecom Holding SAE at the end of December, down from 1.95 million at the end of September, according to the fund's securities filings. Other top holdings were unchanged, including stakes in Egyptian International Pharmaceutical Industries Co and Alexandria Mineral Oils Co.
While he trimmed his stake in Orascom, Mobius added to a position in Aramex PJSC, a freight & logistics company in the United Arab Emirates, in the fourth quarter.
The fund had 6.2 per cent of its assets invested in Egypt at the end of December, down slightly from 6.3 per cent invested in the country three months earlier. Mobius declined to discuss specific holdings.
Not all frontier managers are as worried about Egypt, however.
Larry Seruma, whose New York-based Nile Capital Management focuses on African companies, has about 10 per cent of his Nile Pan Africa Fund invested in Egyptian stocks, up from about 5 per cent six months ago.
Seruma took some profits in Orascom Construction after the shares' recent run-up but still has faith in the company's prospects. "I think the big story is that things were beaten down tremendously; it was just irrational," he said.
Still, Seruma said he too has worries about the value of the Egyptian pound and the country's declining foreign reserves. Much is at stake in the outcome of elections, which could determine whether Egypt will receive international financial backing, Seruma said.
"The new government will have to negotiate a loan with the IMF (the International Monetary Fund) or the World Bank, and the new loan will come with some tough terms. If you have a new government that is not friendly to the West, you are not going to get that loan," he said.