Courtesy of The Financial Times, an interesting look at investing in Egypt, in the face of the violent protests ongoing there.  As the article notes:

“…An old adage, reputedly coined by Nathan Rothschild during the Napoleonic Wars, urges investors to be contrary, and “buy at the sound of cannons, and sell at the sound of trumpets”.

Some intrepid fund managers seem to be heeding the advice, and bought Egyptian shares today.

Cairo’s stock exchange, the oldest and largest in North Africa, remains shuttered, after shedding a fifth of its value last month. Yet four large Egyptian companies have listed global depositary receipts in London, which have continued to trade throughout the country’s political upheaval.

Until recently, this has proven punishing. EFG-Hermes, the largest Egyptian investment bank, slumped 29.5 per cent between Jan 25 and yesterday. Over the same period, Orascom Construction shed 27.9 per cent, Orascom Telecom lost 16 per cent and Commercial International Bank declined 21 per cent

Yet some fund managers smell an opportunity, and swooped on Tuesday. This sent EFG-Hermes’ GDRs up 15.4 per cent, Orascom Construction up 19.7 per cent, and Orascom Telecom climbed 9.4 per cent. CIB, the largest private lender in Egypt, soared 14.3 per cent.

Graham Stock, chief strategist of Insparo Asset Management, says his multi-strategy fund is also looking to pick up bargains amid the detritus of last month’s stock market collapse – once the main market reopens.

“Some investors may not like the risk-reward calculation, and might look to leave, but others will see opportunity here. Egypt used to be a little expensive, but there are some good opportunities now.”

Some analysts are also shifting their view. HSBC, permabulls on emerging markets, today moved Egyptian equities to overweight from neutral, arguing that valuations were now among the cheapest in emerging markets.

Overall, while the domestic and geo-political risks latent in the current situation remain poignant, it is likely that the market is over-pricing the tail risks. In this sense there may be quite a substantial gap between perception and reality. The market looks extremely cheap and quite likely small improvements in newsflow stand to create disproportionate traction. We are moving Egyptian equities to a doubleweight in our GEMs portfolio.

Though Standard & Poor’s today downgraded Egypt one notch to BB (two levels below investment grade), debt markets seem to have calmed down somewhat as well. After climbing sharply for five straight sessions, the cost of credit-default swaps on Egyptian sovereign debt also came down today.

Nonetheless, given that Egypt’s economy has pretty much ground to a halt (close to all ports, railways, banks and shops have closed down) and the still-uncertain political outlook, investors will need exceptional sang-froid to dip into Egyptian stocks.

Indeed, in this case, the sound of cannons is precisely what investors will be hoping they will not hear.