Free Float Pays Off as London Hedge Fund Returns to Egypt

Updated on
  • GAM, Aberdeen among first wave of foreigners tiptoeing back
  • Investors dumped $10 billion of debt in Arab Spring aftermath

London hedge fund GAM UK Ltd. didn’t want to touch Egyptian debt during the years of political upheaval that followed the Arab Spring.

Now, money manager Denise Prime is among European investors making their way back.

Since Egypt floated the pound this month, the currency’s 43 percent decline has virtually eliminated exchange-rate risk, luring GAM and others to short-term domestic debt that yields as much as 19 percent. That’s raising the prospect of a windfall for the government if it recaptures the $10 billion that fled the local Treasury bill market in the aftermath of the 2011 uprising, leaving only about $50 million as of July.

“We would look at other auctions to build a position,” London-based Prime said after making her first investment in Egypt last week since 2008. She bought Treasury bills on the secondary market for a $5.4 billion fund that invests in local-currency debt across the developing world.

Renewed interest for domestic debt signals money managers abroad are more confident that Egypt’s military leaders will take the steps needed to tackle an economic crisis after five years of turmoil in which two presidents were ousted, leaving Africa’s third-biggest economy struggling to stay afloat. Aberdeen Asset Management Plc and Ashmore Group Plc also have Egypt back on their radars after the nation won an unprecedented $12 billion International Monetary Fund aid package last week.

At an auction on Thursday, investor demand for 12-month debt was the highest in more than a year, helping the government reduce yields to 18.90 percent, compared with 20.52 percent in the first sale after the flotation. Egyptian debt has become even more appealing after the central bank raised interest rates by 300 basis points in the wake of the devaluation to stem outflows and inflation.

“For bond investors it’s beautiful,” Jan Dehn, head of research at London-based Ashmore Group Plc, said in an interview Friday, the day the IMF approved the lifeline. Ashmore plans to invest in Treasury bills, Dehn said.

Not all investors are ready to throw their weight behind Egyptian bonds. Thin, illiquid markets may continue to daunt some people, according to Bryan Carter at BNP Paribas Investment Partners in London.

“Post-revolution, many investors found themselves unable to liquidate Egyptian pound-denominated assets,” said Carter, who helps oversee $1.3 billion in assets as head of emerging-markets fixed income. “That experience will keep many investors out.”

Others have started trickling back. The Egyptian currency stabilized after losing half its value in the first three days of the flotation. The pound, the worst performer worldwide this year, retreated 0.3 percent to 15.5 per dollar as of 4:51 p.m. in Cairo after recovering 12 percent in the previous four days, according to National Bank of Egypt prices. Foreign investors have also been net buyers of the nation’s stocks this month.

Seizing on investor interest, Egyptian Finance Minister Amr El-Garhy said last week the country may test the Eurobond market to raise $2.5 billion at the end of November. The 2017-18 budget envisions selling longer-maturity government debt to attract foreign investors, according to the plan released last week.

Aberdeen’s Kevin Daly, who’s avoided Egypt since 2012, was tempted back last week. Like Prime, he bought T-bills on the secondary market.

“This is a story which potentially should improve,” said Daly, who helps oversee about $10 billion of emerging-market debt from London. “You had a huge foreign-exchange adjustment, rates have gone up and now you have IMF money coming in. Country risk is heading in the right direction.”