The Egyptian capital market has seen better days. Losses have been nonstop since June, pushing the market's losses in 2015 to 15.5 per cent, making it one of the worst performers among emerging markets. While the reasons for the decline are both political and economic, some local and others related to international markets, experts blame the dollar crunch and Egypt's opaque forex policy for the bulk of the losses in the capital markets. “Investor appetite for the market has dried up as the scarcity of dollars has made it hard for investors to repatriate their profits,” said Mohamed Radwan, head of foreign sales at Pharos Securities. “Who would stay in a market he cannot quit or get realised profits out of?” he asked. Dollar-denominated equities, which are shares listed on the local market but traded in dollars, have been hit hard, according to Radwan, “as investors have not been able to get enough dollars to buy these stocks.” A handful of listed companies belong to this category, like textiles and apparel manufacturer and retailer Arafa Holdings, the Kuwaiti Egyptian Holding Company and oil-services provider Maridive group. A closer look at the performance of the market's main index, the EGX 30, reveals it has mostly been on a downward trend in 2015. The index, which encompasses the 30 largest companies listed on Egypt's stock exchange, had a strong start to the year as low oil prices and a controlled depreciation of the local currency boosted gains across the market. The positive sentiment before the Sharm El-Sheikh Egypt Economic Development Conference (EEDC) in March supported the market, which started to stumble in April with news of Egypt's joining the war in Yemen. The trend became steeper with the ratification of the capital gains tax on stock market transactions, a move believed to have raised the cost of investments in the market. In May, the EGX30 experienced a further decrease following the government's decision to place daily and monthly limits on foreign currency deposits in bank accounts, amounting to $10,000 and $50,000 respectively. News of the difficulties facing investors in getting foreign currency out of the country have deterred them from doing so and led to speculations in May that Morgan Stanley, the world's leading index provider, was considering excluding the Egyptian stock market from its emerging market index, the Morgan Stanley Capital International (MSCI) Index. This came after Telecom Egypt was taken off the index, leaving only three Egyptian stocks. Analysts said this was the minimum required for a country to stay in the benchmark index. Since 2013, due to foreign currency shortages, the Egyptian market has been the subject of potential exclusion from the MSCI, the indices of which are tracked by $1.3 trillion worth of investments in emerging markets alone. The two-year freeze on the capital gains tax failed to take the market out of its persistent downward trend since June, due to foreign currency worries. The peak of the losses was in August, when the index lost 11 per cent of its value amid the emerging markets crisis that left it one of the most overvalued markets among its peers. “Concerns over emerging markets growth have pushed many countries to devalue their domestic currencies. This made all our pound-denominated assets, be they securities or real estate, overpriced, and thus less attractive,” said Hani Tawfik, chairman of the Egyptian Private Equity Association. The decline in oil prices, which has resulted in a retreat in investment by Gulf and Arab investors, has added to the concerns. Foreign transactions as a percentage of market turnover have been standing at the same 10 per cent for a while. “It is the same amount of liquidity. No new money is entering, and investors can't take their money out,” Osama Mourad, chairman of Acumen Holding, a local investment bank, said. This is compared to 15-20 per cent before the January Revolution. Market experts say that the stock market would benefit from a further devaluation of the pound. “An increase in the dollar's value against the pound would make our market commodities and securities more appealing,” Mourad said. “If the pound loses 10 per cent of its value, the cost of the pound-denominated assets, including shares, will decrease by the same percentage,” he explained. Another indirect benefit would be that listed companies that focus on exporting and do not depend on imported raw materials would realise better sales and bottom lines as their products would have attractive prices in international markets, Tawfik explained, citing cement companies as an example. A Pharos Securities research note said that a steep devaluation of the pound in the near term would not necessarily mean a positive re-rating of the market, however. “Generators of foreign currency will thrive, and other firms may witness margin contractions or suffer from slower liquidity expansion,” it said. Accordingly, Pharos chose some companies to be top picks for the coming period in case of a further devaluation. They included EFG-Hermes Holding, Madinet Nasr Housing, South Valley Cement, Oriental Weavers and Alex Containers.
