Seeking a ‘Turnaround Story,’ One Investor Returns to Egypt
(Bloomberg) -- Investing in the Middle East has never been for the faint-hearted. Marshall Stocker should know. Drawn by Egypt’s economic promise, he moved to the country from Boston in 2010 with a plan to buy and redevelop historic buildings in downtown Cairo on behalf of Emergent Property Advisors, a company he co-founded. But revolution ended President Hosni Mubarak’s three-decade rule a year later, and the economy sputtered amid the political conflict. Stocker decided to leave in 2012 and later published a memoir, Don’t Stand Under a Tree When It Rains, documenting his experiences as an investor in Egypt during the revolt. “As noted in the ending of the book,” he says, “there is an Egyptian saying: ‘If you drink from the Nile, you will return.’” That proved prophetic. Stocker, 44, back in Boston and now managing money at Eaton Vance Corp., is once again investing in the most populous Arab nation—this time in publicly traded equities. The wager is paying off. Egypt’s stock market is one of the world’s best performers this year through mid-March as the nation pushes ahead with tough measures to revive the economy. The Eaton Vance Emerging and Frontier Countries Equity Fund, which Stocker helps manage, outperformed 93 percent of its peers over the previous three months, according to data compiled by Bloomberg on March 21. Stocker spoke with Bloomberg News’s Netty Ismail about his approach to investing in Egypt and other parts of the region.
Netty Ismail: What’s looking attractive in the Middle East?
Marshall Stocker: The opportunities that we see exist in countries where there’s some type of development that’s going to improve earnings and cash flows or reduce the discount rate on those cash flows. What causes companies to earn more money or have lower discount rates are increases in economic freedom: Where the rule of law is improving, the size of the government is shrinking in the economy, and where there’s trade liberalization or simplification of regulatory policy. We’re looking to make broad equity investments in countries where we think economic freedom will be increasing. The two countries that really stick out to us are Egypt, which is coming from a particularly low base, and Kuwait. In Egypt, you’ve got the size of government shrinking, as evidenced by the contraction in the fiscal deficit, and the more effective management of monetary supply to address inflation.
In Kuwait, it’s a bit more complicated. You have a government and parliament that appear to be in ideological disagreement as to how the economy should function and what role the private economy should play. The government appears to be quite reformist, recognizing the need to encourage private enterprise and investment. Meanwhile, parliament continues to advocate populist policies, which may come at the expense of private enterprise. Collectively, we’re encouraged by the direction that Kuwait is taking. They’re also working very efficiently to modernize the capital market there and get themselves upgraded [by MSCI to an emerging market].
That’s where we would see the opportunities to be long. The opportunities to be underweight would be in countries where the opposite is going on. We have serious reservations about Oman with respect to their fiscal sustainability. That speaks directly to the size of government there. Unfortunately, we don’t see any clear reform program that will reverse that.
NI: What are your thoughts on Saudi Arabia and its inclusion in the MSCI?
MS: Saudi Arabia is really mixed. We’re discomforted by the growth in the size of the government as evinced by these megaprojects along with the Saudization program, which reduces the flexibility of companies to hire the most productive workers. Yet, there’s the positive gain that comes from some of the social liberalizations that we’re seeing, with respect to women being allowed to drive. Until we can see a clear reform objective or clear reform ideology instead of what seems to be kind of topic by topic, I’m willing to sit on the sidelines and focus on a place like Kuwait.
NI: Tell me more about your experience in Egypt.
MS: I lived in Egypt in 2010, 2011, 2012—the good, the bad, and the ugly; before, during, and after the revolution. I was there because under the Mubarak regime, in the later years, there had been a fairly aggressive and sustained effort to increase economic freedom in the country. We went in and set up a direct investment fund to buy and redevelop downtown real estate. In downtown Cairo, they have these wonderful late 19th century buildings, very French, but long-neglected due to bad economic policy. Our intent was to buy them and renovate and repurpose them. About a year after I got there, the revolution happened. The central dilemma during a revolution is: Should I be doing business in a country where the government is in open conflict with its people? The conclusion I came to, and it was a principle that we built our business model on, was we had no principal transactions with the government. We were not transferring wealth to the [Mubarak] government. I was there because of the economic liberalization. It’s the same reason I’m in Egyptian publicly traded securities now. It’s the same reason I’m in Kuwait. It’s because these economic liberalization policies affect investment outcomes.
NI: When you left in 2012, did you think that you would invest in Egypt again?
MS: Poor economic policy cannot continue forever. When it comes to an end, good policy is not only the alternative, but a necessity. When we identify governments with credible plans to implement sound economic policies, we invest. Now that Egypt is credibly implementing such policy, [investors] have returned.
NI: You were first drawn to Egypt during Mubarak’s term, and now the country is being led by President Abdel Fattah El-Sisi. With the current political climate, how are things different this time around for you in Egypt?
MS: We focus on economic policy and the potential for liberalizations, which increase a country’s level of economic freedom. Such gains in economic freedom can occur in democracies, autocracies, and anything in between. However, in my published empirical work, countries with a low level of economic freedom, like Egypt, are more likely to have an increase in economic freedom if they are a democracy. I should also add that we consider political governance in our overall risk analysis.
NI: What about the United Arab Emirates?
MS: I don’t want to overlook Abu Dhabi and Dubai. We do consider those very investable markets. The high level of economic freedom and the economic sensitivities of the leadership there are very good. It’s just generally kind of reflected in asset prices, whereas I’d much rather buy a turnaround story like Egypt, or perhaps a long-neglected capital market like Kuwait, a frontier market, which is now an aspiring emerging market. Any efforts in Abu Dhabi or Dubai are probably just on the margin at this point.
NI: What are your biggest concerns about the region, and where do you see the biggest risks?
MS: The region needs to wean itself off of natural resources and not succumb to the Dutch disease, the natural resource curse. That is the challenge. Rather than centrally planning the effort to diversify the economy, it would be better to create the economic freedom, the rule of law, the transparency so that creative minds in each of these countries can determine what’s best as private actors. Only that way will sustainable industries emerge, which will thrive in the unique environment that’s the Middle East. Unfortunately, generally the preference is for economic central planning, and we see that in either megaproject announcements or industrial policies, which generally don’t work out so well.
NI: Where are the other hidden gems in the region?
MS: I also work with our bond investors in the region. We think that Bahrain is very much a hidden gem for a country that in some ways was headed for the rocks. With the GCC [Gulf Cooperation Council] funding commitment came the reform program that we’re particularly encouraged by. [Gulf Arab allies pledged $10 billion in aid to Bahrain last year.] These reforms should hopefully put the fiscal imbalances back in order. I would like to see Bahrain take a second step toward efforts to improve economic freedom. Bahrain was once the gem of economic freedom in the region; competition breeds better outcomes. You’ve seen places like Dubai take the torch from what was Bahrain and Kuwait when it came to economically liberal policies. The hidden gems would be Kuwait, particularly on the equities side, and Bahrain on the fixed-income side. There’s not much to buy on the equities side in Bahrain. Egypt is a gem, but it’s not hidden.
NI: What is your advice to someone who’s investing in the Middle East for the first time?
MS: Almost every aspect of business is the opposite of those customs found in Western nations. This follows through, in part, to investing in publicly traded securities.
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