‘The developments in the roadmap and writing the new constitution saw market sentiment become more buoyant and break the 5500 points resistance level in mid-September' — Osama Mourad A benchmark ending in green territory, increased foreign interest and trading values almost doubling in size — the Egyptian stock market saw a radical change of fortune during the second half of the year. The breadth of the recovery, pushing EGX30 index gains since the beginning of the year till mid-December to 21 per cent, was enough to defy the news of ongoing skirmishes in the streets outside. After stumbling through the effects of political turbulence in the country, economic uncertainty and a myriad of bad corporate-related news in the first six months, the index regained momentum in the third quarter of the year and saw an uninterrupted upward trend in the fourth. The main market gauge, the EGX30, which tracks the performance of the most active 30 companies, lost 13 per cent of its value during the first half of the year. June was the worst month, with the EGX30 hitting its lowest level of 4600 points by its end. The drop came on the back of fears of escalating tensions between Cairo and Addis Ababa relating to a proposed new Ethiopian dam on the River Nile, ousted former president Mohamed Morsi's decision to freeze diplomatic relations with Syria, and uncertainty surrounding the countdown to the opposition demonstrations on 30 June. Also in June, the investment bank Morgan Stanley considered cancelling the local bourse from its emerging markets index due to problems facing foreign investors in repatriating profits on the back of the dollar scarcity in Egypt. “The changes in the political scene, the appointment of an interim president, together with a government of high-calibre technocrats, gave the market its first reason to recover in more than a year in July,” according to Osama Mourad, CEO of Arab Finance Brokerage. This first push was bolstered by news of the Gulf aid package supporting Egypt's reserves and the Egyptian pound and later by details of the new government's stimulus plan. Soon after the ouster of Morsi in July, Kuwait, Saudi Arabia and the United Arab Emirates pledged to give Egypt $12 billion in aid and loans, the sum increasing to $15.9 billion by the end of the year. The Gulf money fed the net reserves, thus supporting the Egyptian pound and making investment in local stocks more appealing. With the governments of the Gulf injecting aid into the economy, Gulf investors also started to buy heavily in the Egyptian market after they had been mainly net sellers for most of the previous part of the year. The violent confrontations between pro-Morsi demonstrators and the military and police after the crackdowns on the sit-ins in Rabaa Al-Adaweya and Nahda Square in Cairo were ignored by the market. The fact that it was closed for only one day after the sits-in were dispersed calmed investors' fears. The market was closed for two months in the wake of the 25 January Revolution in 2011 and nosedived as soon as it reopened. While the activities of some companies were affected by the violence that followed the dispersal of the sit-ins, the effects on company results as well as on the market as a whole were minimised by feelings that the first signs of a more stable political and economic atmosphere were now showing. “The developments in the roadmap and the beginning of writing the new constitution saw market sentiment become more buoyant and break the 5500 points resistance level in mid-September,” according to Mourad. Investors usually jump into the market after its breaking through an important resistance level in the hope of more gains in the index. Such hopes were not dashed this time round, and the market has maintained an uninterrupted upward trend on speculation that renewed political stability will spur economic growth. The fact that the market was emerging from bearish sentiments made the price of shares more attractive to investors. The market saw its first double-digit year-to-date gain in October and kept on adding new scores after that. Compared to its level at the end of June, the EGX30 had soared by 36.7 per cent by mid-December. The market still enjoys the lowest price to earnings ratio (P/E) in the region, at 10.7 times compared to 15 times in Kuwait and 17.1 in Saudi Arabia, making it less expensive and more appealing for investors. Egypt's P/E ratio was 24 times at the end of June. “Average daily volumes now hover around LE500 million, which is double the average volumes of last year but still thin compared to the LE2 billion in 2008,” Mourad said. In mid-December, the market rebounded to reach its highest level since the onset of the 25 January Revolution, breaking through the psychologically important 6,500 resistance level and triggering a strong buying appetite. Meanwhile, both the stabilisation of the Egyptian pound and the decline in interest rates by the end of the year made the dollar and bank deposits less appealing investment alternatives to buying into the market. The pound was trading at LE6.89 to the dollar in the second week of December, compared to LE7.02 in June. At the same time, the Central Bank of Egypt (CBE) has reduced interbank interest rates three times since August, pushing down the overnight interbank deposit rate to 8.25 per cent and the lending rate to 9.25 per cent. While the value of non-Arab foreigners selling orders by far exceeded their busying transactions during the first three-quarters of the year, there was an obvious change of heart during the last three months. Foreigners have become net buyers since the second half of September, with their transactions representing almost 10 per cent of the overall market turnover. “They are back, but they are still cautious. They want to be reassured that the investments they pump into the market, whether in the form of direct investments or portfolio investments, won't be lost tomorrow due to changes in government policies,” Mourad said, referring to a number of privatisation deals finalised during the rule of ousted former president Hosni Mubarak, but then annulled by post-revolution governments and sending negative messages to investors. “The government has to be consistent with its investment-related decisions,” Mourad added. Also this year, talk of levying a 10 per cent capital gains tax on initial public offerings (IPOs) and other transactions spooked the market. While the government later annulled this tax, it did impose a 0.001 per cent tax on all market transactions. Another negative example in the way that governments have dealt with investors came when the government of former prime minister Hisham Kandil surprisingly decided to impose taxes on the Qatar National Bank's acquisition of the Egyptian National Société Générale Bank after the deal was signed. The regulator then cancelled the threatened tax amid dismay from investors and market participants. Those in power during the first half of the year made little attempt to befriend non-Islamist businessmen in Egypt. In general, there was little affection between stock-market investors and the former Muslim Brotherhood government. One of the main signs of improved confidence in the market since the end of the Brotherhood regime has been the series of announcements made by Egyptian companies that they will offer equity in the market through initial public offerings. Such announcements have been made by Ataka Steel, real-estate bellwether Palm Hills, the Arab Cement Company, Mercedes Benz distributor National Automotive NATCO, and Carbon Petrochemicals. Such IPOs should add new blood to the market. The last IPO in the local market dates back to 2010 and was of the Amer Group. In addition to the IPOs, there were also many acquisitions and mergers planned for early next year, Mourad said. “Such deals are called leading indicators, as they indicate confidence in the market and the economy at large,” he added. The market, revealed its chairman Mohamed Omran in an interview with Reuters last month, is taking measures to attract new companies to replace the loss of some of its biggest listings over the past three years. The bourse was hurt when foreign-based companies bought majority stakes in three of its biggest firms, telecoms provider Mobinil, the National Société Générale Bank, and Orascom Construction Industries (OCI), leaving only residual shares on the market. According to Omran, the exchange is revising listing regulations, developing new mechanisms for exchange traded funds (ETF) and rights issues, and working to spur trade on its fixed-income market. OCI was the year's newsmaker, starting with a stock swap deal that resulted in its being listed in Amsterdam under the name of OCI NV.OCI's delisting from the market was one of the most important news through the year. With a market capitalization of LE50 billion, OCI represents 25 per cent of the weighting of EGX30.IT was delisted after its Dutch-based parent company succeeded in acquiring 97.4 per cent of its equity. The market reacted negatively on the back of news of the travel ban on OCI company chairman Nassef Sawiris and his father on charges of failing to pay overdue taxes on a deal executed in 2007. While the ban was lifted after OCI agreed to pay LE7 billion, observers believe that the move sent a negative message about how the government was treating businessmen, even if they were among the country's largest employers. Another headline making news was the collapse of the deal between Egypt's largest investment bank EFG-Hermes Holding and Qatar's Qinvest to set the region›s most diversified financial house. The deal failed after involved parties reached a 12-month deadline without acquiring the approval from the Egyptian Financial Services Authority , the market regulator .
