Traders at the Cairo stock exchangeWhat a week it has been for Egypt.  All the regional political upheaval  happened in Tunisia, half a continent away, but most of the pain has been felt on Cairo’s financial markets. The Egyptian stock market has fallen almost 8 percent and the Egyptian pound is languishing near seven-year lows to the dollar. The cost of insuring exposure to Egyptian debt has risen to 18-month highs.

So are investors preparing for a Tunisia-style popular uprising in Egypt? Or is it that its market, more sophisticated than Tunisia’s, is bearing the brunt of investors’ increasing bearishness on the North African region? Probably a bit of both.

Egypt faces elections later this year and 82-year old Hosni Mubarak, president for almost 30 years, is likely to run again. Just like much of North Africa and the Middle East, inflation, especially food inflation is high while youth unemployment rates are higher than most of the developing world. Risks of uprisings are seen highest in Egypt and Jordan, where there is relatively more political freedom than, say Libya, but leaders lack the oil wealth cushion that the Gulf states or Libya boast. Given Egypt’s “youth bulge” — the proportion of the population comprised of young men aged 15-34 –regime change is a risk, reckons Charles Robertson, chief economist at Renaissance Capital.

Positioning is the main issue, however. Egypt has been Middle East and North Africa (MENA) investors’ favourite market, perhaps by default because of its size and accessibility. Barclays calculates that foreigners hold up to $25 billion in Egyptian stocks and bonds and in bonds, owning 20 percent of the outstanding bonds and 15 percent of the stock market cap, meaning there is significant potential for a market reversal.  Oliver Bell, senior investment officer at Pictet has gone underweight Egyptian stocks, noting: “If alarm bells start ringing in Egypt, there’s potential for quite a lot of money to come out.”

All that means the outlook for the Egyptian pound is poor, though it has stabilised somewhat thanks to the central bank’s efforts. But banks are suggesting expressing any bearishness on North Africa via a bet against the pound – BNP Paribas for instance recommends a short pound position on a three-month non-deliverable forward basis, betting it will depreciate nearly 5 percent in this period. Barclays expects the pound to fall to 6 per dollar over this year from the current 5.80.  Expect little respite before Egypt’s own election, expected in September.