* Egypt stocks jumped 4 pct in May
* Concerns about policy, unrest, currency ease
* Valuations appeal, investors need to be very selective
By Carolyn Cohn
LONDON, June 5 (Reuters) - International investors are being tempted back into Egyptian stocks, after taking a breather this year, viewing a selloff on renewed signs of political instability and currency concerns as overdone.
The MSCI dollar-denominated Egypt index
Concerns about policy and social unrest and the Islamist-led government's struggle to secure a $4.8 billion loan from the IMF, which weighed on the market earlier in the year, have eased.
The Egyptian pound, another source of investor anxiety, has stabilised recently at record lows after falling sharply this year, and appears to be avoiding a major devaluation. Anti-government protests that have sometimes turned violent are continuing, but have nonetheless become less frequent in recent months.
Paul Clarke, who is managing a new Africa fund for Ashburton, said Egypt was likely to have a large weight in the fund.
"Some people consider it quite risky, but in line with higher levels of risk, prices have come off, that could offer value," he said.
"We look at companies that are not as exposed to domestic political issues or risks - we would probably end up with 20 percent of the portfolio in Egypt."
Cairo stocks
Clarke did not name individual stocks, but a number of investors have recommended companies such as Orascom Construction
Orascom Telecom has hit 4-1/2 year highs recently on takeover interest, while Orascom Construction has performed steadily since the uprising that toppled Mubarak, and is the subject of a takeover offer by its Dutch-listed parent.
Investors point to Egyptian companies' expanding interests overseas, including in fast-growing Africa, and to an entrepreneurial culture and strong management teams.
Valuations for the MSCI Egypt index are at a low 7 times earnings, according to Datastream, compared with the average for MSCI emerging markets of around 10 times earnings, making Egyptian stocks cheaper to buy.
CURRENCY CONCERNS EASE
Investors have on average scaled back their exposure to Egypt in the past year, according to Lipper data.
The average of 621 global, emerging market or regional funds which declared any Egypt exposure this year shows a 1.1 percent allocation to the country, compared with 1.6 percent a year ago.
For some investors, the risks continue to outweigh the opportunities.
Egypt's top court ruled on Sunday that parliament's Muslim Brotherhood-led upper house was illegal but could stay on until elections, a ruling which analysts said seemed likely to irritate both sides of Egypt's political divide.
Investors were also selling this week ahead of planned protests on June 30, which marks the one-year anniversary of President Mohammed Morsi taking office. Some are worried the protests could get violent.
"Egypt has some interesting opportunities but both the macroeconomic situation and the political/legislative situation are highly uncertain and in many ways Egypt now resembles a frontier rather than an emerging market," said James Syme, senior fund manager at JO Hambro Capital Management Group.
"It could have a place in a portfolio, but much further out on the risk-reward spectrum."
But Egypt, where foreign investors make up more than 40 percent of stock market activity, has attracted some big names.
Veteran emerging market investor Mark Mobius of Franklin Templeton told Reuters late last year he was looking to add to his Egypt position.
The country's weighting in the Franklin Middle East and North Africa (MENA) fund rose to 13 percent by the end of 2012, from 6 percent at the end of March 2012.
Egypt's weighting is also more than 4 percent in the Templeton Frontier Markets Fund, which has grown so much that Templeton said last week it was soft-closing it - limiting investment to existing shareholders only.
Other investors who have increased their Egypt weightings include ING and Silk Invest, according to Lipper.
The Egyptian pound has weakened by more than 11 percent this year, hitting record lows against the dollar
But a currency collapse that looked imminent at the end of last year hasn't happened, as the central bank has managed to stabilise the pound by rationing dollars. Loans from Qatar, Libya and Turkey have also helped.
"Inflationary pressures appear to have eased a little - we suspect this largely reflects the stabilisation of the pound in recent weeks," analysts at Capital Economics said in a note.
"Social tensions have calmed in the past few weeks, with no renewed bouts of large-scale civil unrest," they said.
Andrew Brudenell, frontier fund manager at HSBC Asset Management, is cautious on exposure to Egypt overall, but said he liked companies such as Commercial International Bank
"From the spring of 2012 to now, some of the quality companies that we still like have been opportunities to add," he said. "We try to add when we think everyone has given up."
(Additional reporting by Joel Dimmock and Sujata Rao in London and Patrick Werr in Cairo; Editing by Susan Fenton)
((carolyn.cohn@reuters.com)(44 207 542 6320)(Reuters Messaging: carolyn.cohn.thomsonreuters.com@reuters.net))
Keywords: EGYPT STOCKS
