CAIRO: After nearly two weeks of Israel s massive offensive against Lebanon, the Egyptian stock market recovered all the losses it made in the initial days of the crisis. The CASE-30 index, which tracks the top 30 stocks on the exchange, fell by an average of 4 percent per day in the first three days of trading following the Israeli army s strikes on Beirut and elsewhere in Lebanon. But the stock market rallied heavily this week, with the CASE-30 index reaching 5,558 points, exceeding the month s previous high of 5,492 that had been achieved on Jul. 11 prior to the escalation of violence. It s one of the best weeks in the last three or four months, says Mahmoud Soheim, head of research at Naeem Holdings. Optimism is prevailing a little bit. The recovery occurred amidst a continuation of violence and an increasing possibility of a prolonged Israeli offensive despite diplomatic efforts to contain the situation. Regional and international leaders met in Rome on Wednesday in search of a resolution for the crisis but failed to reach common ground on an immediate ceasefire. Meanwhile, the Israeli government announced its intention to reoccupy a portion of southern Lebanon until the area is secured and monitored by a multinational force. Investors were bullish despite these recent developments, which is in part a reflection of domestic market conditions and their independence from regional instability. The previous corrections left stocks generally undervalued, says Walaa Hazem, an associate at HC Brokerage. It is therefore normal that prices would rise. Whether this will continue depends on political and economic conditions. The stock market has experienced a number of corrections since the beginning of the year, resulting in a condition in which the share prices of several companies are below their fair value, according to analysts. This year s corrections followed a substantial rally in the last quarter of 2005 off the back of major privatization issues, during which a large number of small retail investors entered the stock market. These small retail investors have proven highly sensitive and have driven increased volatility in prices. This has been the trend for about a year now. It makes the market fluctuate more because retail investors are not as stable as institutional investors, says Hazem. However, just as retail investors have accentuated the decline in prices in previous corrections, they also played a central role in this week s rally, having carried out the majority of trading. Institutional investors, on the other hand, have been more cautious. Nevertheless, many analysts agree that investors have already accounted for the risks related to the ongoing conflict. The conflict in Lebanon has most certainly already been priced into the market, HC Brokerage said in a report earlier this week. "News of the Israeli-Lebanon crisis is already discounted in the market, Mohammed Radwan of Delta Securities also tells Reuters. Domestic investors, in particular, do not always associate regional instability with bearish sentiments. In 2003, when the United States struck Iraq, the Egyptian stock market was not affected, says Hazem. Foreign investors may pull their funds out of the Middle East [as a result of regional instability], but local and Arab investors will tend to keep their funds in the region. Investors from the Gulf were substantial participants in the Egyptian stock market, but many were forced to exit during the significant decline in share prices in Saudi Arabia, Kuwait and elsewhere in the Gulf earlier this year. Soheim believes this trend is beginning reverse and that Arab investors will be net buyers. The companies fundamentals are very good, says Soheim. [But] it will take several weeks until the confidence of investors is returned fully. In addition to strong second quarter results, investors may be encouraged by the opportunity for Egypt to attract tourists who would have normally visited Lebanon. Tourism is the main contributor to gross domestic product and when there is a possibility of an increase [in tourism] investors are encouraged, says Soheim.
