London–Mass protests in Egypt, one of the darlings of African and Middle Eastern investors, sharply increase the risks that international investors will withdraw funds from some other economies in the region.
Fund managers were relatively sanguine about the upheaval in Tunisia which drove President Zine al-Abidine Ben Ali to flee earlier this month, as Tunisia is a frontier market which doesn't feature on many portfolio managers' radar screens.
But they did then point to the potential for contagion across parts of the Middle East and North Africa (MENA), with Gulf markets seen as relatively insulated, but Egypt an especially big risk.
That contagion appears to have started.
Egypt's currency hit a near-six year low, stocks fell 6 percent and debt insurance costs soared to their highest in 18 months on Wednesday, a day after massive "Day of Anger" demonstrations called for an end to President Hosni Mubarak's 30-year rule.
Protesters who tried to gather on Wednesday were quickly dispersed and the government said it was banning demonstrations.
But significant damage has been done to investor confidence. At least US$150 million left Egyptian local bond markets on Wednesday, according to data from investment bank Citi.
"The more tension that develops in the Middle East and Africa, the more readily investors will choose safety over capital gains, and thus eschew investments in the area," said Tom Dorsey, president at investment advisers Dorsey, Wright & Assoc.
"Cash is preferable over equities in Egypt today, and that will be my path until the markets suggest otherwise."
Egypt makes up only a small proportion of the benchmark MSCI emerging equities index, but has been a favorite among both MENA and Africa investors, due to the government's readiness to embrace financial reforms, a young population, growing consumer demand and relatively cheap stock market valuations.
It also features in Goldman Sachs' N-11 list — the next 11 economies after the BRIC economies of Brazil, Russia, India and China, for which the US investment bank sees rapid growth.
Egypt's stock market rallied 15 percent last year and foreigners account for around 16 percent of the Egyptian stock exchange's total trading value over the last five years.
But the rising young population in Egypt and elsewhere in the region can be a double-edged sword, as a jobless population is more likely to stir political unrest.
Average youth unemployment in MENA is almost 30 percent, World Bank data shows, nearly double the levels in Latin America and eastern Europe.
"One of the risks in the region is destabilization in politics," said Ghadir Abu Leil-Cooper, head of emerging equities at Baring Asset Management, whose MENA fund is invested in Egypt.
"In Egypt, we are not there with regime change. Am I watching it very closely? Yes. Do I know the outcome? No. Do I think that Egyptian asset prices look attractive? Yes, but there is no reason to rush into them."
Protests across the region, which have included Algeria and Jordan as well as Egypt and Tunisia, are bound up with the price of food.
Rising food prices globally are even more strongly felt in emerging markets, which tend to have a higher weighting for food in their consumer price baskets.
Egypt's problems are likely to add to concern about countries which have already seen protests, and also in countries like Lebanon, facing a change of government, or Nigeria which is due to hold elections this year.
Ratings agency Fitch affirmed Egypt's rating at BB+ with a stable outlook earlier this month, but said inflation was a challenge.
That stable outlook could change if prices shoot higher.
"If I see inflation rising sharply, that would increase the risks," said Richard Fox, head of Middle East and Africa sovereign ratings at Fitch.
"Egypt is less likely to spiral out of control than Tunisia, but the key question is the momentum (of the protests)."
Credit Suisse last week downgraded Egypt to neutral from overweight.
"In retrospect it wouldn't have been a bad idea to go underweight," said Robert Ruttman, emerging equities strategist at Credit Suisse in Zurich.
Longer term however, Egypt remains an attractive proposition, Ruttman said, and the impact on Gulf stock markets is likely to be limited due to small and relatively wealthy local populations.
"There is less of an incentive to protest and less to gain," said Ruttman who remains overweight Saudi, Kuwait and United Arab Emirates.
Cairo-based private equity firm Citadel Capital also sees Egypt and Algeria among four of the best African economies — its acronym SANE covers South Africa and Nigeria also.
"Investing in these geographies is not for the faint-hearted, but the compelling returns make it a core part of any high-growth strategy," said Citadel Chairman Ahmed Heikal in a note.
"If you want to wait until there is no risk, go invest in Switzerland and be thankful for 1.4 percent on your 10-year government bond."
