Stability in sight

Stability in sight

Egypt can stake a valid claim to have been the most turbulent MENA market in the past couple of years. While in 2014 Cairo claimed the mantle of the world’s best performing stock market – the benchmark Egyptian Stock Exchange (EGX) index surged 31.6% – 2015 saw a big reverse as it was drawn into the wider savaging of emerging markets. As sentiment towards Egypt turned sour the EGX30 fell from a high of 10,000 points in February 2015 to barely over 7,000 by year-end 2015.

Relief may have to wait. Recent events haven’t helped; the downing of a Russian airliner in November led to a sharp downturn in tourism arrivals, affecting a crucial hard currency earning economic sector. Early 2016 brought further pain, with the EGX30 falling by another 14.4% in January with lower oil prices and the global slowdown adding to a further selloff in emerging market assets. This comes despite other indicators that reveal Egypt as one of the more robust markets in the region, with solid GDP growth of 4.2% in 2015.

“The market was down almost 40% last year because of investor concern and tighter monetary policies,” says Yasser Darwish, chairman of Waha Portfolio Management, a Cairo-based asset manager. “We’re hoping that in the coming year things will stabilise, in the wake of government policies to support the economy.”

Some in the market point out that Egypt’s market was primed for a fall, given stretched valuations. “We saw a big rally shortly after the second revolution when the government was undertaking reforms. Maybe that got ahead of itself and wasn’t supported by an improvement in companies’ underlying performance,” says Jason Tuvey, a Middle East analyst at consultancy Capital Economics.

While Egypt is inextricably linked to the regional economic slump, the oldest MENA exchange has survived nationalisations and economic doldrums and is now a beneficiary of lower oil prices. “We’re part of the regional turbulence but are benefiting from some aspects as we’re net oil importers – and that will release pressure on the budget deficit,” says Ahmed Mokhtar, managing director of Cairo-based NBK Capital.

Mokhtar points out that Egypt’s market offers interesting sectors and is grabbing the attention of regional players, particularly in light of low valuations. “We started the year in the red but hopefully the stronger economic numbers and healthier corporate performances will kick in – most companies are showing strong results in sectors such as real estate, food and beverages as well as banking – and that will have a positive impact on the market. We’re waiting for the dust to settle, but once it does, the risk compression will create a lot of interest in the Egyptian market.”

Indeed, corporate health is appears to be improving. Of the 177 companies that announced financial results for the first half of 2015, 135 reported profits, which amounted to EGP14.5bn ($1.9bn). It represented an increase of 17% year-on-year.

Large economic projects and a government reform programme should provide a broad-based uplift for the Egyptian market. However, in the short term, counterintuitively, the major New Suez Canal project unveiled in August 2015 had a negative impact on the EGX.

“The Egypt stock market is retail driven, so the impact of the New Suez Canal Project had a significant impact,” says Amr Sonbol, head of HSBC Securities Services,Egypt. “Retail investors liquidated their positions to subscribe to the New Suez Canal Certificates. More recent projects have had a more positive sentiment on the market.”

Higher levels of foreign direct investment – which rose 15% to $6.3bn in 2014-15 financial year – are another source of confidence. Equally important are government changes, for example the central bank’s decision in late January to raise the cap on dollar deposits for staple imports to $250,000 monthly, or its equivalent of the foreign currencies, from $50,000. The move should have a positive impact on companies exposed to the food and pharma sectors.

There is an expectation of more listings to give added impetus to the market. “They’re talking about some big public companies coming to the market, some banks and large state-owned enterprises, and that will help for sure,” says Darwish.

Six public companies are to be offered, including two banks being set up for semi or full privatization. The Central Bank of Egypt is readying the United Bank of Egypt and Arab Investment Bank for initial public offerings (IPOs). At least one IPO is expected this year, though a lack of liquidity may delay matters.

Private sector IPOs are also expected, with investment managers eyeing Q2 as the time the market is likely to be tapped. Beltone Financial stated that it expects to manage four stock market flotations worth a total of more than $300m in the first half of 2016 on the back of improved market conditions. The local bank and asset manager is itself looking at an IPO of some of its stock this year.

Money managers can look forward to some decent business in Egypt. “There’s strong potential for private pension funds, with changes allowing them to invest in debt and equity markets – and that gives a huge potential for money managers to get involved in a wide range of investment opportunities,” says Mokhtar.

The lack of derivative activity in the market is one area where improvement is needed. “Derivatives have long been talked about and I’d love to see some of these, as it would allow us to benefit from the volatility,” says Mokhtar.

Regulatory initiatives such as dividends & capital gains taxes as well as ETF regulations (allowing only one market-maker) have led to greater confidence in the market. “The suspension of capital gains tax is a move that has been positively received by international investors. The change in ETF regulation has underscored that the regulators are trying to support the market and help introduce new products,” says HSBC’s Sonbol.

In May 2014 Beltone Financial was granted Egypt’s first licence to create an ETF, following the regulator’s push for new rules and amendments to margin trading rules designed to boost liquidity. Since January 2015 the EGX has allowed trading in ETFs.

Not all changes have been welcomed. In February 2015 the central bank’s introduction of capital controls to clamp down on the US dollar black market caused concern among investors about profit repatriation.

“One key market issue, which is not solely a securities services issue, is the foreign currency crisis, which is a key concern for investors,” says Sonbol. “However, there is an understanding that this economic condition is changing and awareness that the central bank’s introduction of the new repatriation mechanism will be key for their investment in the market.”

Securities services changes are a work in progress. The introduction of the new delivery versus payment (DVP) model is due in March, of which custodians will be direct members. These are seen as significant changes, though investors with long experience in Egypt have developed a reasonable level of comfort with the market infrastructure in terms of settlement and custody.

The authorities are seeking to encourage more foreign investment. And, there is a likelihood of closer cooperation between Egypt’s market and the Gulf markets – leading to a cross border corridor of issuance. A memorandum of understanding was signed last year, enabling dual listing in Dubai and Egypt. Egyptian investors can now easily buy and sell shares on the Nasdaq Dubai exchange through a newlycreated link with Misr for Central Clearing, Depository and Registry (MCDR).

For retail investors, the new link should be useful. It allows Egyptian brokers to trade seamlessly on the Nasdaq Dubai through Cairo-based MCDR, using Egyptian pounds. “MCDR acts as settlement agent and custodian through its connection with Nasdaq Dubai’s central securities depositary, to support the transfer of shares between Egypt and Dubai. This provides an opportunity for Egyptian companies to dual-list securities on Nasdaq Dubai,” said Hamed Ali, chief executive of Nasdaq Dubai.

The Gulf connection could potentially provide a big boost for Egypt; Saudi Arabia, the UAE and Kuwait have been stalwart financial supporters over the past few years. Despite the Saudi kingdom’s domestic economic challenges, in late January 2016 it agreed to lend Egypt $20bn to finance the purchase of oil products over the next five years, the latest in a series of financial pledges intended to shore up Egypt’s foreign exchange reserves.

Ratings agency Moody’s said the pledges will support the country’s balance of payments, which lately have been under pressure from a widening merchandise trade deficit, weakness in tourism and lower deposit inflows and grants from the Gulf.

Another change will see the launch by year-end 2016 of a new agriculture focused commodities trading exchange, the first of its kind in the Middle East. One concern this year is a potential devaluation of the Egyptian pound, in light of government moves to ease foreign exchange restrictions. But large corporates such as BP and Siemens have signed up to sizable multi-billion dollar investment deals and Egypt’s market should eventually move away from the huge fluctuations of recent years to a more stable investment climate.

As one experienced Egypt-watcher says, Cairo has seen it all before. “The normalisatiton of the political situation should provide the necessary political stability, and with that stabiilty should come economic stability and then capital market reforms,” he says. “The cycle is looking good for the MENA region’s capital market grandfather.”

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