Egypt stock market outlook remains uncertain

Dubai: Last year Egypt was among the hottest stock markets in the world with a stellar return of more than 50 per cent, reversing almost the entire loss it suffered in 2011 amid the Arab Spring turmoil.

But, investors are still nervous about the uncertain political situation. It seems their apprehension was not misplaced. From the start of this year, politics and economics seem to have conspired to make the North African stock market one of the most volatile in the world, with an overall decline of 5.11 in the main index.

Clashes between opposition and government supporters; the freezing of assets of prominent businessmen and officials, which were later reversed; charges of tax fraud against Egypt’s biggest weighted stock, Orascom Construction Industries (OCI); the ballooning budget deficit and the decline of the Egyptian pound; as well as the government’s cancellation of an emergency International Monetary Fund loan; have all contributed to the market’s poor performance. Foreign investors have been among the net sellers in the past few weeks.

“The main culprit for this lacklustre performance is the political situation which remains anything but calm,” said Wael Ziada, Cairo-based head of research and managing director at investment bank EFG-Hermes. “Also, the deterioration in the macro [economic] conditions since the revolution is not, in my view, fully reflected in the stock market performance or the current valuation.”

“We believe that an overvalued currency, as well as the potential delisting of Orascom Construction Industries from EGX30 could be reasons behind lacklustre investment climate,” said Ahmad Hafez, senior analyst at brokerage firm HC Securities in Cairo.

However, media reports last week, quoting Egypt’s finance minister, suggest that the government is close to a deal with Orascom Construction Industries.

Pressure on the pound

Ziada went on to add that the performance of the market in dollar terms made the Egyptian market perhaps “one of the worst performing markets in the region this year”, for foreign investors.

And, it is likely the uncertain outlook may continue to bedevil the markets in the coming months. “The rising pressure on the overvalued Egyptian pound, the dire need for the government to cut energy subsidies (which is inevitable in our view), the potential escalation of political unrest due to unpopular court verdicts and the uncertainty regarding both the IMF loan and the parliamentary elections, [lead us to] believe that uncertainty may be high in the coming months,” said Hafez.

Reda Gomma, portfolio manager at Mashreq Asset Management, believes the current government lacks the skills necessary to manage the political crisis. “Consequently the economy [is] stuck in a rut, from which it does not appear likely to escape anytime soon,” Gomma said. He expects the high volatility to continue. 

Mashreq’s Makaseb Arab Tigers Fund has 7 per cent invested in Egyptian stocks.  Over the next six months, he will be watching the country’s efforts to secure external funds, specially a $4.8 billion (Dh17.62 billion) IMF loan, and to hold peaceful parliamentary elections.

Ziada sees the market range bound for much of 2013. “An uncertain political and economic outlook will continue to weigh on the market and value traded is likely to remain low for as long as currency controls are in place,” he said. “A significant devaluation of the Egyptian pound at the same time as major fiscal reforms [particularly subsidy cuts] could trigger a lasting surge in the market.

“Stock specific triggers — such as a mandatory tender offer for OCI shares or a resolution of the [problems at] Orascom Telecom’s Algerian subsidiary, Djezzy — could drive shorter term rallies in the market,” he added. “An IMF deal could generate a short rally but this will not be lasting unless the authorities make major structural economic reform, which I believe will be very challenging if the political situation does not improve — and improve significantly.”