Foreign investors: Between liquefying stock portfolios and awaiting ‘Amer's manoeuvre'

Initial results indicate that foreigners are intensifying sales to make a profit margin from transferring their money abroad in dollars

The dollar rate continues to dominate the business direction of economic sectors in the Egyptian market, including the Egyptian Stock Exchange (EGX), especially after the sudden Central Bank of Egypt (CBE) decision last Wednesday to raise the Egyptian pound's value against the dollar from EGP 8.03 to EGP 7.83. The step was made after a number of pound devaluations throughout the year.
To foreign investors, there is an investment connection between dollar price movements and the attractiveness of investing in the EGX, as an increase in the dollar's price provides more opportunities to buy greater amounts of stocks listed in pounds without bearing any additional financial burdens.
However, the current EGX investments before the dollar price increase are being negatively affected, given that the value of the stocks listed in pounds decreases when converting to the dollar, in order to transfer the money abroad.
The present situation of increasing the pound against the dollar made selling more attractive, compared to buying.
Nevertheless, executive directors at investment and asset management companies asserted that the foreign investors' anticipation is clear in the EGX, until the CBE reveals the orientation of the country's monetary policy, in order to avoid the high risks in case the CBE continues in its vacillating position regarding the dollar file.
However, another group of investment experts believes foreign investors will resort to selling to benefit from the current increase in the pound's value, on one hand, and for their certainty that the pound's future is to take another decrease, even on the medium term, given that it is currently overvalued.
Ambiguity dominates investment scene
Managing Director and Head of Asset Management at HC Securities and Investment, Omar Radwan, says investors have no expectations regarding the CBE's next step. "Will there be an additional increase in the pound's value in the next few days, or will CBE prefer fixing the exchange rate at this level, until another decision is made, whether to decrease or increase the pound's value?" Radwan questioned.
He added that this situation is new to foreign investors, where it has been common to devaluate the pound and consequently increase the buying incentives in the EGX, making investors cautious when it comes to selling. However, what happened now is quite the opposite. That is why investing in stocks will be fully anticipated.
EGX made great losses last week, reaching 9.75%, bringing the EGX-30 Index down to 6,807 points. Foreign investors led this loss by registering a net sale of EGP 352.82m.
A transitional period followed by a balanced system for exchange rates
A recent report by Pharos, after the CBE decision, said the CBE surprised those who thought that the devaluation decision was very late. It added that this decision was made at a time that does not include any auctions for hard currency.
According to the report, this step was taken to punish foreign currency gamblers, although the limitation of Amer's resources and experiences indicate that there will be a tendency to end the actual link between the pound and the dollar in the future. At the end, the new CBE governor will seek to push the pound's exchange price to a more flexible system. This step will facilitate the expected negotiations with the International Monetary Fund (IMF) in order to ensure the arrangements of a pipeline loan to cover the financial gap of 2016.
Meanwhile, Pharos recommends that the stock market investors in general, not just foreign investors, start establishing long-term investment positions in anticipation of a reform process in the exchange rate system. This process includes basic identifications of supply and demand, targeting the exchange rate balance.
Foreign investors have no choice but to wait
On the other hand, CEO of Prime Investment Bank, Mohamed Maher, said the pound appreciation is normal and not necessarily a temporary transition phase, as it may also be followed by a new appreciation.
He further added that there are two reasons behind his theory; the first is the governmental banks' initiative of offering investment saving certificates with revenues of 12.5%. This revenue will increase demand for the pound, pushing a number of currency dealers to abandon the dollar in order to benefit from the high interest rates.
As for the second reason, Maher said the pound devaluation over the past period was not due to a high demand for the dollar, but due to the growing role of exchange companies and the creation of a hard currency black market. This led to a scarcity of state resources, pushing it to raise the dollar price in order to attract a part of the currency available in the parallel market.
Maher eliminated the possibility of foreign investors' tendency to sell a part of their portfolios in the stock market in order to benefit from the current increase of the pound's value. He added that they will prefer to remain calm with their transactions until they are sure of the monetary policy regarding the pound.
Primary indications to facilitate portfolios
Conversely, Head of the Investment Department in Cartel Capital, the US company for direct investment, Ayman Abou Hend, said the tendency to sell by foreign investors is considered the logical choice now, as the pound is overvalued.
He added that the current situation means two things; first, that it is better to sell before a further pound depreciation in order to benefit from the profit difference when they transfer the funds abroad in dollars. Secondly, if they buy with the current price, foreign investors will enter the market with higher values than what the pound will record in the future.
The session succeeding the CBE's decision last Thursday witnessed intensified selling by foreign investors, particularly by institutions, as it reached EGP 96.427m. The session witnessed the most selling this year.
Abou Hend highlighted that all indicators affirm that the pound depreciation is not optional, as foreign currency reserves have declined last October to record $16.41bn, while the gap in trade balance increased as well as the budget deficit and inflation.
He also noted that offering high interest savings certificates and providing foreign currency to traders and factories now, in order to allow the passage of a part of the goods held up in ports, are only temporary palliatives. This will increase the value of public debt services and decline foreign reserves.
He further revealed that the consequences will be the need to issue more banknotes in order to pay off public debt obligations, which will increase inflation rates. On the other hand, there will be scarcity in dollar resources, which will ultimately lead to the depreciation of the pound in order to attract foreign direct and indirect investments and support local product competitiveness.