Egyptian stocks posted their best quarter in a year as increased political stability combined with the world’s cheapest equities lured investors.
The benchmark EGX 30 Index gained 18 percent in the three months ending Sept. 30, the biggest advance since the 24 percent increase in the third quarter of 2012 and among the top 10 returns of 94 benchmarks tracked by Bloomberg. Cairo-based Ezz Steel, the country’s largest publicly traded manufacturer of the metal, soared 47 percent in the period, and Six of October Development & Investment, a luxury real-estate developer based in Giza, climbed 46 percent.
Investment Minister Osama Saleh says buyers are mostly Egyptians and trading volumes remain low after the military took over July 3 from President Mohamed Mursi. The EGX 30 is still down 16 percent since Arab Spring protests in January 2011 and the measure fetches 0.6 times estimated 2014 book value, the cheapest among the 45 largest equity markets tracked by Bloomberg. Dividend yield for companies on the EGX 30 is projected to jump 34 percent next year, second to Russia’s Micex Index, to 4.5 percent, data compiled by Bloomberg show.
“The military’s action was viewed as bringing more stability,” Dubai-based Walid Mourad, who helps manage about $400 million of Middle East and North Africa equities at ING Investment Management Middle East Ltd., said Sept. 29 by phone. “There are buying opportunities if investors are selective.”
The EGX 30’s gain last quarter compares with advances of 5 percent and 7.7 percent for MSCI’s emerging markets and world indexes. The measure advanced 0.3 percent in Cairo today.
The yield on the government’s benchmark 5.75 percent Eurobonds due in April 2020 tumbled 294 basis points, or 2.94 percentage points, to 7.21 percent last quarter, as Egypt received $12 billion in aid from Saudi Arabia, the United Arab Emirates and Kuwait. The funds helped the central bank halt seven months of currency depreciation, sending the pound 1.8 percent higher since the end of June to 6.8916 a dollar.
The Egyptian Exchange closed for almost two months in the first quarter of 2011 as a popular uprising forced President Hosni Mubarak out of power. During Mursi’s presidency, which started in June 2012, the EGX 30 increased 5.6 percent. The military-backed government of Prime Minister Hazem El Beblawy, which came to power after Mursi’s ouster, is overseeing constitutional amendments that will lead to parliamentary elections in the first quarter of next year.
“There has been local demand seen in the stock market, which will attract foreign buyers,” Investment Minister Saleh said in an interview last week at Bloomberg’s headquarters in New York. “Investors are becoming more confident in the new cabinet and new administration expectations, which is partly responsible for the rise in assets.”
Telecom Egypt, the Cairo-based state-controlled company that rose 18 percent since the end of June, will make a dividend payout next year equal to 9.6 percent of today’s price, data compiled by Bloomberg show. Eastern Tobacco, the country’s monopoly cigarettes maker, will pay an 8-pound dividend for the year that ended in June, up from 7 pounds last year, according to projections on Bloomberg.
The relatively high dividends are tied to benchmark interest rates that are more than twice the level of other North African countries, said Simon Kitchen, strategist at Cairo-based investment bank EFG-Hermes Holding SAE. Egypt’s benchmark overnight deposit rate of 8.75 percent compares with 3 percent in Morocco and and 4 percent in Tunisia.
Inflation accelerated to about 10 percent in the last three months, up from 4.3 percent in November. The economy is stuck in the worst slump in two decades after the popular uprising in 2011, with growth remaining around 2 percent for a third year, according to the median of 16 analyst estimates compiled by Bloomberg.
“You may get what looks like a really nice yield on Egyptian stocks, but there’s a good chance you’ll lose part of that either through devaluation or inflation,” Kitchen said by phone Sept. 26. “The political situation is far from clear and the economy is still weak so it’s hard to make the argument that Egyptian stocks are attractive at the moment.”
Average daily trading volume over the past year has slumped about 60 percent to 345 million pounds ($50 million) compared with the year leading up to the 2011 revolution.
Foreign investors have been hesitant to return to the North African country. Non-Arab foreigners, as classified by the bourse, were net sellers on about 75 percent of trading days since the end of June. That month, index provider MSCI Inc. said it may consider excluding Egypt from its emerging-market gauges should a foreign currency shortage prevent investors from taking their money out of the country.
The economy is showing signs of improvement. The balance of payments recorded a surplus of $237 million in the year to June compared with a $11.3 billion deficit a year earlier, the central bank said last week. Foreign direct investment is starting to return with Coca-Cola Co. and Samsung Electronics Co. among companies looking to invest, Saleh said in the interview. Egypt will try to attract $6 billion of foreign direct investment in the next 12 months, or about 75 percent of pre-crisis levels, he said.
Volatility on the benchmark stock index is also decreasing. The stock gauge’s 30-day volatility, a measure of price swings, declined to 17 on Sept. 30 from a six-month high of 41 in July. That compares with 44 for Dubai’s benchmark, 28 for Greece’s and 14 for Germany’s, data compiled by Bloomberg show.
“Dividend-paying stocks are definitely providing an attractive entry point for some investors now,” Hany Genena, head of research at Cairo-based Pharos Holding, said Sept. 26 by phone. “The absence of investments over the last three years has forced companies to settle debt and return cash to their shareholders until the political and economic outlook becomes clear.”