Has the pound's devaluation pulled the capital market out of its long slump? Sherine Abdel-Razek sounds out the views It was every investor's dream. Cheap shares, low exchange rate risk and available foreign currency for investors to repatriate profits at the end of the day. The new foreign exchange regime has made the dream a reality. The ailing bourse, in limbo for the past two years, has finally sprung into action. Since the pound was floated last week, market indices have been shooting up at unprecedented rates. Hermes' Financial Index increased by around 25 per cent in the first three days of the new regime. Foreigners became net buyers, with their transactions counting for an average 40 per cent of overall market turnover. "We have not had such increases since the revival of the Egyptian capital market in the early nineties," said Khaled El-Mahdy, head of research at HSBC bank. He said foreign investor interest was quickly apparent. "They bought in advance of the impact," El- Mahdy said. "They did not wait to see the consequences. They are betting on the instantaneous effect, which is the market being cheaper in general than other emerging markets." The effect of the decision on individual shares was also intensified due to the lifting of the ceiling on stock price movement. Last August, the government lifted a five per cent ceiling on the movement of the12 most active local shares. Two more companies were added to the list last week. "This time the shares were able to reach their full potential, surging by up to 20 per cent a day," El-Mahdy said. Although the market has been extremely cheap for some time, the managed exchange rate caused expected revenues to be outweighed by the accompanied risk. Among these risks was the fact that foreign investors were unable to repatriate their profits in dollars. "The problem was complex not only due to the exchange rate volatility risk, but also because of foreign currency inavailability," El-Mahdy said. Traders and market analysts unanimously believe the market has regained confidence -- a fact illustrated by the increase in equity investments. Investors were putting most of their money in the less risky, fixed-income bonds during the last period. "Equities now corner more than 75 per cent of transactions," said Joseph Iskandar, investment analyst at Prime Securities. Analysts agree that with the pound devalued and share prices going down, the Egyptian market's general P/E ratio, a determinant of the cost of realising profits, will be among the lowest in the region. A closer look, however, shows that some companies will benefit more than others. "A company with dollar-denominated revenues exceeding its forex costs, technically called a company with a hedge, will benefit and the opposite is true," El-Mahdy said. A good example of the first case is the carpet producer, Oriental Weavers. "Nearly 56 per cent of the company's turnover comes from exported production, while forex operational costs do not exceed 26 per cent, which means the company has almost 26 per cent of its sales volume as a hedge, and thus will benefit a great deal from the move," El Mahdy said. Iskandar believes that Orascom Construction Industries will be among the lucky gainers. "More than half of the company's revenues are in dollars and it does not have imported inputs. It depends on revenues from its cement subsidiary, Egyptian Cement Company, which is a leading cement exporter," he said. Neither of the two other market heavyweights, MobiNil and Orascom Telecom Holding (OTH), will be negatively affected despite their foreign debt burdens, a Prime Securities report said. OT will capitalise on the proceeds of the sale of Fastlink, its Jordan affiliate, and the expected divestiture of Telecel, its sub-Saharan subsidiary, leaving the company with dollar revenues exceeding its liabilities. The losers camp include companies with a high portion of imported inputs. "The milling sector will be hit. Most of their production of Flour 72 is from imported wheat. I believe a lot of investors will quit the sector," El-Mahdy said. On the other hand, the cement sector will cash in on the move, being totally dependent on domestic raw materials, the report said. The recent trend towards exporting local production makes the outlook for the sector even more positive. A cheaper pound will advance exports and relieve a domestically over- supplied market. Transactions on shares traded in the international markets as Global Depository Receipts (GDRs) are expected to be more stable after the floatation. This positive effect was forecast by the International Monetary Fund (IMF). In a statement released after the Egyptian government announced it was floating the pound, the IMF said it believes the move will inspire confidence in the Egyptian financial market. The money market, now facing fierce competition from high yields on equity investments, reacted dramatically to the floatation. Inter-bank rates immediately shot up to 15 to 17 per cent and remained high at between 7.5 and 10 per cent earlier this week. "This was expected," said Elie Khouri, chairman of Cairo Barclays Bank. "Interbank rates will increase as banks rush to cover the demands of their clients, but this increase will not be substantial. Eventually there will be stabilisation." The currency will finally reach equilibrium, reflecting both market forces and the productivity of the economy. Khouri said while conventional wisdom might dictate raising the interest rates, low interest rates worldwide will eventually bring them back down. Interest rates on the Egyptian pound were maintained to prevent investors from hoarding dollars.
