Stock markets in Egypt and Tunisia are starting to lure back foreign investors after the ousting of decades-old autocratic regimes, but some blue-chip shares could struggle because of links to previous governments.
While conflict and protest continue to hit countries in the Middle East and North Africa from Libya to Syria, these markets have traditionally not attracted large international portfolio flows, due to underdeveloped markets or lack of foreign access.
Economies like Egypt and Tunisia, however, were increasingly a favourite with emerging market investors prior to regime change, and investors and investors who fled during the countries' revolutions are now looking for ways to get back in.
Fund tracker EPFR estimates around $80m left dedicated Middle East and North Africa funds this year.
Egypt opened its stock exchange last week for the first time in nearly eight weeks, following the downfall of President Hosni Mubarak. The reopening headed off worries that Egypt could be ejected from the MSCI emerging equities index, used as a benchmark by many emerging market investors.
Before its closure and after it reopened," Cairo, the region's most liquid and biggest bourse, saw a big cash exodus. Its main index fell to a two-year low last week, with 2011 losses reaching 30 percent.
Tunisia's market has closed twice for several days at a time, after the ousting of President Zine al-Abidine Ben Ali in January. State telecoms operator Tunisie Telecom was forced to postpone a planned listing in Paris and Tunis.
But the tide could be turning; on Sunday, Cairo posted its first gain since mass protests erupted on Jan 25, and markets rose again on Monday.
Tunis fell 20 percent this year up until the second closure on Feb 28, but has risen 10 percent since it reopened on March 7.
Traders say investors are grabbing stocks they believe have become cheap. Egyptian heavyweight Orascom Telecom for example, is up 20 percent since the reopening.
"We have been buying, we like the look of some of the banks, construction companies, telecoms," said Graham Stock, chief strategist at Insparo Asset Management.
But he added: "We are wary of companies that are too associated with the Mubarak regime."
Stock's concerns are shared by many. They stem from action taken by the new government against the many businesses that are seen to have benefited from links to the Mubarak family.
Investors say the Egyptian stock exchange has required them to confirm their clients do not include a number of individuals associated with the Mubarak regime. In Tunisia, firms say a blacklist of companies associated with the Ben-Ali regime has been drawn up by the new authorities.
There was an undeniable nexus between business and the government in both countries. In Egypt, 70-80 top businessmen sat in Egypt's old parliament as members or allies of the govermment. Tunisia's central bank estimated recently that 180 companies were controlled by associates of Ben Ali and his wife.
Yet many investors worry that asset expropriations and action against big businesses may end up causing more capital outflows and harm the ability to attract foreign investments.
One London-based fund manager who was previously positive on Egypt said he had become more cautious.
"Things have changed a bit. There is a concern that the country may spend a bit too much time looking backwards rather than forwards and there could be some scapegoats," the investor said. "Most of the successful companies pretty much had a good relationship with the powers-that-be.
Shares in Egyptian firms Ezz Steel and property developer Palm Hills have tumbled 40 and 50 percent on the year respectively, with both firms' chairmen facing charges for alleged crimes under the former government.
Few doubt the countries' long-term potential, with some even likening Egypt to Turkey in terms of demography and companies.
But these are challenging times for North Africa where economies are suffering the fallout from months of protests.
Tourism and direct investments are down, remittances from citizens employed in Libya and Bahrain are suffering and it is costlier to raise cash on bond markets.
Investors are also wary of other markets where there have been protests, but no regime change, such as Morocco.
Oliver Bell, who helps manage $10 billion in emerging stocks at Pictet, recently cut his underweight on Egypt and says the newsflow on witchhunts has in fact started to abate.
He attributes recent buying partly to the looming dividend season -- some firms such as Telecom Egypt and petrochem firm Sidi Kerir have 10 percent dividend yields, he notes.
But Bell is steering clear of Morocco and Tunisia.
"Morocco has escaped the turmoil so far but there were 35,000 people on the streets recently so you can't rule it out," he said.
"The money that goes into Morocco also tends to look at Tunisia. The newsflow on Tunisia has been positive but with everything else going on, I want to see the whole picture."
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