Analysts expect negative effects on EGX after raising interest rates

Continuation of increased interest on savings threatens the attractiveness of stocks: experts

The Central Bank of Egypt (CBE) continued its policy of reducing the money supply in the market through a new interest rate hike at the Monetary Policy Committee (MPC) meeting on Thursday, which has negative effects on short-term investments on the Egyptian Exchange (EGX).
In May, the CBE raised interest rates by 2%. At the time, the impact was limited on the market, curbing it to 12,300 points. However, it rebounded strongly, led by purchases of foreign institutions, towards a historic peak in the month of Ramadan, after the increase was limited to deposits without saving certificates.
In the course of last week's transactions, the EGX witnessed a decline in the value of transactions below EGP 1bn, in line with the imposition of the stamp duty on the stock exchange. Selling was limited to Intraday Trading Statistics and next day of purchase.
However, the transactions last Thursday saw strong foreign purchases in leading stocks, especially the Commercial International Bank (CIB), reaching EGP 140m, next to EFG-Hermes, which suffered from selling pressures and fell from EGP 25.7 to EGP 22.1, before consolidating on Thursday back to EGP 23.2.
Radwa El Sweify, an analyst with Pharos Holding for Financial Investments, said that raising interest rates does not change the structure of investors in the EGX, where the capital market is the best option for foreign investors in Egypt, with net purchases of some EGP 9bn since the flotation in November 2016.
She explained that the presence of foreigners in high-yielding treasury bills, who represent the buying fuel of the stock market, after successive increases in prices, are not candidates for market migration.
She noted that the negative impact on the lure of private traders with high interest will appear if the banks reacted with the raising of interest rates and issued certificates of savings with high returns, but limiting the increases to deposits will confine individual reacting to the rate hike.
She added that statistics indicate a decline in the stock market by 1-2% on the back of raising the interest rate every time.
Hesham Hassan, head of technical analysis at Acumen for Securities, agreed, saying that the market is able to absorb the new interest rates, provided no banks offer investment certificates, similar to the 20% saving certificates.
He added that the market targets support levels of 12,950-13,000 points during the coming period in light of the expected negative effects on the stock market in the short term, and he said that the optimal strategy during the current period is the retention of shares, because the expected purchasing power is able to lift shares.
The main index of the EGX—EGX30—fell by 0.19% last week to 13,369.88 points, which is for the fourth week in a row.
The turnover amounted to 946.3m shares worth EGP 2.6bn.
Market capitalisation closed at the highest level since the session on 11 August 2008 to EGP 700.87bn, up by EGP 5.66bn over one week.
The EGX70 closed at 673.82 points, up by 3.76%, with turnover of 130m shares worth EGP 740m.
The EGX50 was up by 0.55%, closing at 2,094.58 points, with turnover of 1.02bn shares worth EGP 2.98bn.
Meanwhile, the EGX100 closed in the green zone at 1,546.45 points. Turnover amounted to 1.07bn shares worth EGP 3.36bn.
Foreign and Arab investors tended to buy, netting EGP 241.9m and EGP 18.2m respectively, while Egyptians tended to sell, with a net sale of EGP 162.4m.
Commercial International Bank (CIB), the largest relative market share, was up by 1.64% at EGP 81.27. The turnover was at 4.8m shares valued at EGP 394.6m.