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Egypt’s 77% equities rally tips generals winning

Share volume is up 159 per cent this year over 2013’s daily average, according to data compiled by Bloomberg, coinciding with voters’ approval of a new constitution and the military’s endorsement of Defence Minister Abdel Fattah Al Sisi’s possible presidential bid.

The benchmark EGX 30 Index rose 18 per cent in 2014 at 10:39am in Cairo, the fifth-best performance of more than 90 gauges tracked by Bloomberg, with all but one of its members in a rising trend as of Tuesday, the data show.

Three years after protesters ended President Hosni Mubarak’s 29-year rule in a popular revolt that left hundreds dead and led to the slowest economic growth since 1992, local investors are piling back into Egyptian stocks amid speculation another military-backed ruler can restore order.

The EGX 30 is trading near the highest since 2008, while volatility of the index fell last week to the lowest since before the start of the 2011 uprising.

“When it comes to economic security, the military is a very fundamental safety net,” Ziad Akl, a senior researcher at state-run Al Ahram Centre for Political and Strategic Studies in Cairo, said by telephone on February 10.

“The fact is we’re weeks away from a Sisi presidency whether we like it or not. Locals realise the instability we’ve seen over the last three years isn’t a suitable environment for investment. Foreign investors won’t come if it’s unclear who’s in charge of the country.”

Government resigns

Prime minister Hazem El Beblawi’s government resigned this week, adding to speculation Al Sisi is approaching the formal announcement of his candidacy. Outgoing Housing Minister Ibrahim Mahlab, a member of Mubarak’s dissolved National Democratic Party, has been tasked with forming a new government.

The benchmark index retreated 0.5 per cent on Wednesday, paring its gain to 77 per cent since June 23, the day the army said it was ready to step in at the height of a political dispute between then president Mohamed Mursi and his rivals.

That makes it the strongest bull market since an 88 per cent surge over four months in 2009, and compares with an 8.6 per cent increase for the MSCI Emerging Markets Index over the past eight months.

“The market sees the candidacy of Al Sisi as pointing towards political stability,” Dubai-based Rami Sidani, who helps manage about $800 million at Schroder Investment Management Ltd, said by phone on February 9.

“With a strong president supported by the people and the military, the most powerful institution in the country, investors are anticipating economic development will go back on track.”

Egypt’s military controls a large segment of the economy, with commercial interests from food manufacturing to road building and real estate. Al Sisi, a member of the country’s top military council under Mubarak’s leadership, was promoted to Defence Minister by the Islamist Mursi before overthrowing him last July. Mubarak was a military man himself, reaching the rank of air marshal before entering politics as vice-president to Anwar Sadat in 1975.

Most expensive

Some of the market’s biggest companies have soared past their pre-2011 revolution levels. Commercial International Bank Egypt, the country’s largest listed lender, traded at 36.5 pounds on Tuesday, after hitting a 17-year high a day earlier. While lending was almost flat in 2013 amid sluggish economic growth, increased holdings of high-yielding government debt helped the bank boost 2013 profit by 35 per cent, beating analyst estimates.

Egyptian stock valuations are approaching those in the Arabian Gulf, which has been relatively insulated from regional political turmoil. The average price-to-earnings ratio of stocks on the EGX 30 is at 15.3 times, higher than benchmark gauges in Abu Dhabi, Kuwait and Qatar, and almost on par with Dubai and Saudi Arabia.

The Egyptian measure is among the most expensive in the world, according to its 14-day relative strength index, which reached 80 on Wednesday. A reading of more than 70 on this index may signal that securities are poised to decline.

Status review

“Valuations appear a bit high at the moment with limited potential upside,” Ahmed Hafez, co-head of research at Cairo-based HC Securities, said by telephone on February 12.

“The market is being influenced by retail investors and optimism about stability that presidential elections may bring.”

MSCI in June threatened to review Egypt’s emerging-market status for downgrade to frontier if a foreign-exchange shortage worsens. A cut would force funds with emerging-market mandates to take their money elsewhere. As foreign investment dried up and tourism shrank amid political unrest over the last three years, a shortage of dollars has led to the rise of a currency black market where the greenback trades at about a six per cent premium to official prices.

Ratings boosts

Still, higher prices and currency risk haven’t stopped the biggest investment banks from boosting ratings. Goldman Sachs Group raised CIB to buy from neutral on January 28. It decided on similar rating increases for Telecom Egypt, the monopoly land-line phone company, Ghabbour Auto, the biggest publicly traded car assembler, and ElSewedy Electric Company, the largest listed manufacturer of cables.

The 50-day moving averages of 29 companies on the EGX 30 are greater than the 200-day averages for those stocks, indicating the shares are on an uptrend, according to data compiled by Bloomberg. That compares with 25 at the peak of the 2009 bull market.

Local investors have powered the gains, accounting for 87 per cent of total traded value in January compared with 79 per cent in 2013, Egyptian Exchange data shows. Non-Arab foreign-investor participation slumped to 6.3 per cent in the month from 14 per cent last year.

Economic growth has been tepid since Mursi’s overthrow. Gross domestic product rose at a one per cent pace in the quarter that ended on September 30, and may have accelerated to two per cent in the following three months, according to former planning minister Ashraf El Arabi, down from a 6.2 per cent annual average in the last five years of Mubarak’s rule. Inflation has remained above 10 per cent over the last five months.

‘Liquidity rally’

The central bank is due to meet tomorrow to set interest rate levels. Three cuts in the second half of 2013 brought the benchmark overnight deposit rate down to 8.25 per cent, the lowest since October 2011. Government borrowing has surged more than three-fold since the revolt to 364 billion pounds, or about a fifth of gross domestic product, according to central bank and Finance Ministry data.

“This is a liquidity rally, rather than a reflection of a decline in systemic risk,” Wael Ziada, head of research at EFG-Hermes Holding SAE, Egypt’s biggest investment bank, said by phone on February 16.

“This is a clear case of the market benefiting from the central bank’s monetary-policy easing through lower interest rates and lending the government significant amounts.”

The EGX 30’s fifty-day volatility dropped to 7 on February 17, the lowest since January 2011, before advancing to 13 on Wednesday, according to data compiled by Bloomberg. That compares with 34 on August 18, days after the violent dispersal of sit-ins by security forces of tens of thousands of Mursi supporters in Cairo. That measure of price swings ranged from 29 to 44 during 2009’s bull market.

“The market is a voting mechanism, and at the moment it appears it’s more comfortable with the current regime than it was in the Mursi era,” Cape Town-based Malcolm Gray, who helps manage $2 billion at Investec Asset Management Ltd, said by phone February 10. “It may not be in the best interest of democracy, but this is how people are reacting to the instability they’ve seen.”