DUBAI: Egypt's benchmark share index has been on a rollercoaster ride, plunging to a two-year low on Wednesday last week before rebounding 12 percent from that low as the initial days of voting in a six-week parliamentary election went smoothly, with relatively little street violence. The index is still down 44 percent this year. Most foreign investors still appear to be staying out of the market because of the country's worsening economic crisis. Foreign reserves have been falling, threatening to force a devaluation of the Egyptian pound, and the government is struggling to finance its budget deficit. "At the moment we are being very careful, we just want to stand back" in Egypt, said Raj Morjaria, partner at Aureos Capital in London. "Subject to what happens politically, I would not expect to see investment there yet, though probably by the end of our investment period, in 2013." Mohamed Radwan, head of equities at Pharos Securities in London, said: "My biggest fear is the liquidity crunch for the government and the fear that devaluation is imminent unless the new Cabinet to be formed does something drastic and miraculous in a very short space of time." Many fund managers said, however, that they expected Egypt to stabilize economically and politically in the long term — and for a few, valuations of stocks have fallen so low that it may be worth buying even if the Egyptian pound subsequently slides, cutting the value of the investment in foreign currency terms. "Lots of investors are waiting for a devaluation, but that type of thing happens all the time and valuations are sufficiently attractive for me here," said Emad Mostaque, Middle East strategist at Religare, an emerging markets financial services group. MSCI upgrade Gulf investors are gearing up for a key decision in December by index compiler Morgan Stanley Capital International on whether it upgrades the United Arab Emirates and Qatar stock markets to emerging market status. But global markets are so gloomy that a positive decision might not trigger much of a rally. "The timing is important and the timing of this is not in our favor at the moment," said Mohammed Yasin, UAE-based CAPM Investment's chief investment officer. "Many institutional investors will say they are not in the market now, because they would like to see more liquidity to be able to be a part of this market." He added that much of the money in equities had flowed into bonds over the past year, and that trend was likely to continue for now. In June, MSCI delayed until December a decision on whether to upgrade the two Gulf Arab states from frontier market status, citing insufficient feedback from market participants on new payment systems for institutional investors. An upgrade would potentially lure fresh foreign funds into the UAE and Qatar. Dubai's benchmark saw a spike in trading volume on Monday and Abu Dhabi's index also rose amid rumors that the UAE would be upgraded. The Dubai index is up 2.6 percent this week, rebounding from multi-year lows. But Sebastien Henin, portfolio manager at investment firm The National Investor, said speculation about the impact on the UAE was probably overblown. "From a flow point of view, we would be talking about a only few hundred million dollars coming in due to the UAE's weighting — there might be a rally for a few days, but it will be short-lived," he said. "You can say the market is cheap, but we've been saying that for two to three years." Qatar might benefit more from an MSCI upgrade, analysts said. The index is the best-performing in the Gulf so far this year, down just 1 percent. Strong economic growth, government funding of infrastructure projects and natural gas revenues have protected Qatar from global volatility. "Qatar is a healthier market and international interest is still much higher than in UAE. Therefore, positive effects of an MSCI inclusion could be more evident," said CAPM's Yasin. However, while the UAE has satisfied the main requirements stated by MSCI, Qatar has yet to raise foreign ownership limits on stocks, which are 25 percent for most stocks. MSCI said earlier this year that without this reform, Qatari companies would not qualify for an upgrade. The stock exchange has asked companies to raise limits and is seeking government approval for a blanket move. Yasin said that at the year-end, any rally in response to news from MSCI would be backed mostly by day-traders and speculators looking for short-term gains. "Most people by this time are trying to stabilize their investments and their investment returns, so that when the end-of-year balance sheet comes out, it doesn't affect them negatively," he said. –Additional reporting by Carolyn Cohn in London
