Key highlights:

• Egypt’s economic potential: Africa’s second-largest economy and a population of 116 million, presenting a vibrant market.
• Currency and inflation dynamics: The recent currency refloat, and reduced inflation pave the way for renewed investment potential.
• Sectoral investment opportunities: Targeted exposure in healthcare, consumers, banking, industrial, and fintech sectors.
• Our broad exposure to Egypt: Fawry: Leveraging financial inclusion in a largely cash-based economy. And Edita: Capitalising on improved margins and attractive valuations.
• Resilience and adaptation: Corporates focus on exports and localisation, aligning with broader investment horizons.

Egypt, Africa’s second-largest economy (after South Africa), offers a wide range of companies and industries and is also Africa’s second-most-traded stock exchange. Annually, we do on-the-ground research, looking for lucrative investment opportunities that will benefit our clients invested our African Frontiers strategies. We have just concluded another deep dive into this economy and what it offers. This note highlights our key findings.

Population dynamics

Egypt is Africa’s third largest population at 116 million (after Nigeria and Ethiopia). In the 12 years that we have been investing in the country, the population has expanded by 13 million people. It has a relatively unique population pyramid; 10 to 20 years ago it went through a period where the population was relatively static. However, over the last 10 years, the birth rate is tracking more like a typical emerging market.

Currency challenges and elevated debt levels

Egypt’s finances have been under severe strain for a few years, and this led to currency issues. The country got itself into too much debt, and now interest costs are taking up too much of the revenue the government collects. The Central Bank of Egypt tried to hold the currency, which meant for much of 2023 the official currency market did not function. Then in March 2024, authorities allowed the currency to free float, and it went from 30 Egyptian pound to the dollar to around 50. Since much of the economy had been operating using parallel exchange rates, inflation had already picked up. Although it is trending down, inflation remains high. From Q2 25, there should be sharp correction to inflation.

It is worth noting though there is evidence of where the funds have gone that resulted in these high debt level. There have been infrastructure improvements, with a new city being built, there are new roads, and railways lines right across Cairo.

The re-floating of the currency coincided with Egypt being thrown a lifeline when Abu Dhabi acquired a land plot along Egypt’s north coast (Mediterranean Sea) for $40bn. The area is known as Ras Al-Hikma. This huge inflow allowed Egypt to restore its reserves (not quite $40bn, as part of the price was settlement of previous loans, but still an inflow of around $25bn), and take some pressure off the foreign exchange markets. In an instant, Egypt became investible again.

Following the big currency devaluation, and the build-up in reserves, our view was that the currency would enter a period of stability. So, we were interested in businesses that had a big local currency exposure. Contrastingly, the corporates we met were all about externalising their businesses, finding ways to increase exports or increase local sourcing. I guess this is the difference between time frames - investing in a business over the next three years, while the management teams are thinking long term.

Egypt and Kenya rank as the most attractive markets currently. We have a broad exposure to Egypt, including healthcare, consumers, banking, industrial and fintech. We have recently added Fawry and Edita, demonstrating the portfolio’s ability to adapt to dynamic market conditions and deliver competitive returns.

Fawry is a fintech business that offers digital payments solutions. It also offers other services, such as small loans. The growth opportunity is driven by Egypt still largely being a cash economy, with just 26% of the adult population having a bank account. The government’s push for financial inclusion, which aligns to our commitment to support economic equity and accessibility, will provide tailwinds.

Edita is a snack manufacturer, selling products like biscuits, cakes, candy and croissants. We have always admired this business, but the valuation has seldom been attractive. Recently though Edita’s share price is more interesting, following a period of margin compression (raw material costs rising with the currency weakness). We expect the margins to slowly recover, as selling prices increase, and costs are benign in the short term. We believe that investments in consumer businesses like Edita contribute to job creation and support local supply chains, advancing social transformation.

Investments like Fawry and Edita demonstrate how our research insights directly inform our investment decisions, ensuring exposure to businesses poised for recovery and expansion, and with sustainable and responsible practices.     

With little currency pressure expected in the short -term, and PE ratio of around 6.4x, Egypt will remain the largest country position. At Old Mutual Investment Group, we believe that in-depth, on-the-ground research distinguishes our approach, allowing us to identify nuanced opportunities in undervalued sectors. Our proactive decision-making, such as increasing exposure to resilient local businesses post-devaluation, reflects our commitment to robust portfolio construction.

We are committed to long-term, sustainable investment outcomes. This is reflected in our thorough research and strategic decision-making. By maintaining a diverse portfolio in Africa, we are not only navigating current market challenges but also positioning ourselves to capture growth in some of Africa’s most dynamic economies. What we are after is delivering value for our clients through disciplined investment processes that integrate ESG and transformation considerations, contributing to a brighter, more equitable future for the continent.