CAIRO/DUBAI: Political uncertainty is sapping demand for Egyptian equities and is likely to take the momentum out of any rebound in the coming week, analysts say. Trading volumes have been weak since the Muslim Brotherhood announced at the weekend that it would back its deputy leader to contest a presidential election, raising suspicions that it is rowing back on a pledge not to monopolize political institutions in the new Egypt. A rally that made Egypt the world's best-performing stock market early this year — the benchmark index rose as much as 51 percent — was built partly on optimism that the Brotherhood was working with the country's army rulers to avoid a showdown before the voting in May and June. This optimism has now been dented, while uncertainty over whether Egypt's political forces will rally around difficult economic reforms to cut the state budget deficit has also contributed to a 10 percent drop in the index since early March. The government had hoped to seal a $3.2 billion emergency financing package from the International Monetary Fund last month, but now says it expects a deal in June. Economists see the loan agreement as vital for helping replenish foreign reserves and the confidence of investors; the country has spent more than $20 billion in foreign reserves since last year's uprising to prop up its currency. In the last few months the decline in reserves has slowed - they dropped $600 million to $15.12 billion in March, compared to a slide of roughly $2 billion every month late last year – and this may mean the country can cope with the delay to the IMF deal. Nevertheless, the deal is seen as crucial to unlock a range of foreign aid for Egypt, so any delay is negative for investors. Mohamed Seddiek, head of research at Prime brokerage, said the rally early this year had left Egyptian equities at levels where the market was more sensitive to risk. "I actually think the market was looking expensive prior to the news that the Muslim Brotherhood was going to nominate a candidate for the presidency," he said, forecasting a choppy market characterized by low trading volume and small daily gains or declines in coming weeks. "I think foreign buyers might come back when a new president is in place," he added. "We can't have a mechanism to price equities as long as we don't have a president." Saudi banks In the Gulf, investors are looking ahead to first-quarter earnings announcements to justify the confidence which has driven the Saudi stock market up more than 23 percent this year to a 3-1/2-year high. Banks are expected to start reporting next week and to post very strong profits for the quarter. Commercial banks made a combined net profit of 10.24 billion riyals ($2.73 billion) in the first two months of this year, up from 7.44 billion riyals a year earlier, according to data from the central bank. Bank lending to the private sector rose 12.1 percent from a year earlier in February, its fastest growth in 35 months. "Banks have been posting strong numbers this quarter because provisions decreased by about 30 percent and the fees from bank operations - brokerage and asset management - are expected to be high," said Hesham Abo-Jamee, chief executive officer at Bakheet Investment Group. Some of this performance is already reflected in share prices; the bank stocks index has risen 22 percent year-to-date. But Abo-Jamee added, "Banks are still looking attractive at current PE (price-to-earnings) multiples and have good potential to increase further." Al Rajhi Bank, one of Saudi Arabia's largest, is projected to report a quarterly net profit of 2.1 billion riyals, according to Bakheet Investment Group and NCB Capital, up 23.5 percent year-on-year. It is trading at 14.4 times this year's estimated profit, according to Thomson Reuters data, compared to an historical range of 10-43 times in past years and a banking index multiple of 12.3 times. "Banking will be the strongest performer in Q1 - most are expecting a 20 to 25 percent increase in net income," said Farouk Miah, acting head of research at NCB Capital. Growth could slow in the future as low interest rates and increasing competition limit banks' scope to raise fees for bank services, according to Jadwa Investment. But the undertone remains bullish for this year, it said. "Banks have room to increase their earnings in 2012...The sound domestic economic environment means demand for new bank lending should rise further and with banks very liquid, total lending growth will pick up," Jadwa said in a report.
