{"id":659771,"date":"2013-05-23T07:53:02","date_gmt":"2013-05-23T11:53:02","guid":{"rendered":"http:\/\/blogs.reuters.com\/globalinvesting\/?p=9621"},"modified":"2013-05-23T07:53:02","modified_gmt":"2013-05-23T11:53:02","slug":"paid-for-the-risk-egypts-tempting-pound","status":"publish","type":"post","link":"https:\/\/mereja.media\/index\/659771","title":{"rendered":"Paid for the risk? Egypt\u2019s tempting pound"},"content":{"rendered":"

Surprising as it may seem, the Egyptian pound has got some fans.\u00a0 The currency has languished for months at record lows against the dollar and the headlines are\u00a0alarming — the lack of an IMF aid programme, meagre hard currency reserves, political upheaval. So what’s to like ?<\/p>\n

Analysts at Societe Generale say that\u00a0just looking at the spot exchange\u00a0rate of the pound is missing the bigger picture. Instead,\u00a0they advise\u00a0buying 12-month non-deliverable forwards on the pound — essentially a way of locking into a fixed rate for pound against the dollar in a year’s time depending on where you think it may actually trade. They write:<\/p>\n

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The implicit yield at this point is 21 percent for the 12m NDF, which we think is quite attractive. The way to think about Egypt NDFs is to approach them as a distressed asset. The risk\/reward is quite attractive, and a lot of the bad news has been priced in. Yes, there have been serious delays in the programme negotiations with the IMF and that has clearly been a negative for the overall country view, but I would like to point out that the actual 12m NDF level has hardly budged in the process. This to me suggests that the valuation looks particularly good.<\/em><\/p>\n

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One year\u00a0 forwards are typically calculated by assuming the currency will depreciate over 12 months by an amount equivalent to the currency’s deposit rate over that period. However, the non-deliverable forward on\u00a0dollar\/pound, a cash-settled FX forward calculated from open market pricing, implied a pound exchange rate at 8.5 pounds per dollar in a year’s time – more than 20 percent weaker than today’s spot price of 6.9 per dollar. This means that there is more than 10 percent pure currency depreciation (i.e. outside of the deposit rate) priced on the NDF. Given that this is well in excess of what many assume will be the actual pound decline, the trade starts to look attractive despite all the economic and political pessimism. In other words, the NDF rate is assumed to have priced in excessive gloom.<\/p>\n

Graham Stock, an investment\u00a0strategist\u00a0at frontier fund\u00a0Insparo, also likes the pound. He says\u00a0a maxi devaluation does not appear on the cards as\u00a0wealthier neighbours such as Qatar, Libya and Turkey have stepped up with multi-billion dollar loans.\u00a0The currency collapse that looked imminent at the end of 2012 hasn’t happened as the central bank has managed to\u00a0stabilise the pound\u00a0by rationing dollars.\u00a0Moreover analysts now reckon that Egypt will muddle through without IMF aid this year\u00a0– instead it\u00a0may tap\u00a0the IMF after elections\u00a0(due later this year) when measures such as scrapping subsidies can be more easily implemented.\u00a0Meanwhile (Stock says):<\/p>\n

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You get compensated for taking the risk and you earn good carry. They may not be able to do an IMF deal but they are getting a lot of support from neighbours, there is general willingness to support them. You want the yield which is 15-20 percent.<\/em><\/p>\n<\/blockquote>\n

Not everyone is\u00a0into the trade\u00a0though. The implied yield of 18-21 percent — well above what one can earn in other high-yield markets\u00a0such as India or Brazil — is\u00a0alluring but risks\u00a0too are big\u00a0given\u00a0Egypt’s\u00a0balance of payments problem\u00a0and ugly politics.\u00a0Luis Costa, head of CEEMEA currency\u00a0and debt strategy at Citi, first\u00a0wants to see\u00a0Egypt\u00a0cutting energy subsidies which\u00a0currently eat up\u00a0a third of government spending. Once\u00a0 that happens,\u00a0Costa says, he will take another look at the pound.<\/p>\n","protected":false},"excerpt":{"rendered":"

Surprising as it may seem, the Egyptian pound has got some fans.\u00a0 The currency has languished for months at record lows against the dollar and the headlines are\u00a0alarming — the lack of an IMF aid programme, meagre hard currency reserves, political upheaval. So what’s to like ? Analysts at Societe Generale say that\u00a0just looking at […]<\/p>\n","protected":false},"author":7384,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[7],"tags":[],"class_list":["post-659771","post","type-post","status-publish","format-standard","hentry","category-news"],"_links":{"self":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/posts\/659771","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/users\/7384"}],"replies":[{"embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/comments?post=659771"}],"version-history":[{"count":0,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/posts\/659771\/revisions"}],"wp:attachment":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/media?parent=659771"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/categories?post=659771"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/tags?post=659771"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}