World-Beating Stock Rally May Be Just the Start for Egypt

If history is any guide, Egyptian stocks’ world-beating gains following the nation’s currency devaluation may be just beginning.

The EGX 30 Index has jumped 14 percent since Monday’s 13 percent weakening of the pound. The gains are an echo of what happened in January 2003, when a foreign-currency shortage that gave rise to a black market for dollars and deterred investment led policy makers to devalue the currency by 14 percent. On that occasion, the measure went on to more than double in value by year-end as foreign reserves recovered.

“We can draw a lot of parallels with 2003,” said Salah Shamma, a money manager at Franklin Templeton in Dubai who helps oversee a $108 million Middle East and North Africa fund that had a 17 percent weighting in Egyptian stocks at the end of January. The devaluation “is a step in the right direction to start attracting foreign flows into equity and fixed income, which we expect to happen,” he said.

The EGX 30’s four-day advance since the central bank’s decision is four times the increase for Shanghai’s main index, the second-best performer. About 5 billion pounds ($563 million) of shares traded over that period, equivalent to more than two weeks of normal trading activity over the past year. The gauge remains among the cheapest in developing countries, trading at about 9 times the estimated 12-month earnings of its members. That compares with a ratio of 11.7 for MSCI Inc.’s emerging-markets gauge.

If the central bank’s strategy is successful, a cheaper pound may attract more foreign investment and tourists and boost exports, but it doesn’t come without risk. Governor Tarek Amer initially resisted calls for a devaluation since taking office in November for fear that the expected rise in inflation would negatively impact the poor. Almost half of Egyptians live near or below the poverty line, while inflation has averaged 10.1 percent over the past three years.

While the central bank has weakened the pound multiple times since 2011, the moves were smaller and usually spread out over days or even weeks. In addition to Monday’s devaluation, the regulator has lifted almost all foreign-currency banking restrictions on individuals and companies and has pumped $2.4 billion into the market over two weeks -- almost five times the amount of dollars it would typically sell in a month.

Non-Arab foreign investors were net buyers of 106 million pounds of shares on Thursday, the most in a single day since June.

“The overhang on the market should be lifted to a certain degree now that we have a clear message from the central bank” on currency policy, Shamma said.

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