Egypt’s dollar drought is driving last year’s best-performing Middle Eastern stocks toward a bear market as trading slumps.
The EGX 30 Index slumped 2.6 percent on Thursday, extending the worst start to a year since the Arab Spring revolt in 2011 as the average value of shares traded dwindled to a 16-month low. The gauge also crossed a technical threshold called the death cross this month, which some investors interpret as the harbinger of a further slump.
Equities have tumbled 17 percent since a seven-year high in February, just shy of the 20 percent threshold for a bear market, as foreign investors struggled to repatriate their cash amid a dollar shortage that prompted the reappearance of a black market on Cairo’s streets. The scarcity of greenbacks has persisted even after Egypt received $6 billion of aid from Gulf Arab allies last month.
“My big concern is the relative lack of liquidity in the market,” Simon Kitchen, a strategist at EFG-Hermes Holding Co., Egypt’s biggest investment bank, said by phone from Boston on Wednesday. “This is related to tightness in the foreign-exchange market, which can put the recovery in the economy and stock-market earnings at risk. There is further market downside if these issues are not addressed.”
The EGX 30 has fallen for seven days, matching the longest losing streak since October. The declines pushed both its 50-day and 100-day moving averages below its 200-day mean, completing the death-cross pattern for the first time since 2013.
The retreat accelerated this week as MSCI Inc. removed Telecom Egypt Co. from its country gauge, a move that Kitchen said raises the prospect for a downgrade from an emerging market to a frontier nation like Pakistan, Morocco or Sri Lanka.
Telecom Egypt’s “exclusion from MSCI and the associated investment outflows are reflecting just how shallow this market is becoming,” Mohamed Radwan, the head of equities at Cairo-based Pharos Holding, said by phone.
The MSCI Egypt Index now has the minimum three equities required for clsssification as an emerging market, making it less diverse and potentially exacerbating capital outflows, EFG-Hermes analysts wrote in a report Wednesday.
The value of shares traded has plunged by about half to an average of 459 million Egyptian pounds ($60 million) a day in the past three months compared with the year-earlier period, according to data compiled by Bloomberg.
Unregulated trading has picked up as the central bank sustains the currency at 7.6301 per dollar, boosting speculation it may devalue the peg again following a 6.3 percent drop in February. Reflecting these bets, shares of Commercial International Bank Egypt SAE in Cairo are trading at a 3.4 percent discount to London-listed stock.
Like Morocco, which was downgraded to frontier status in 2013, “Egypt’s weight in MSCI’s EM index has been getting lower over time and people have been having trouble getting their money out,” Kitchen said. “Eventually, MSCI will ask investors if they think the EM classification is appropriate.”