Egypt’s 77% Stock Rally Tips Generals Winning Investors
Egyptian stocks are showing all the signs that investors favor a return to a military-backed rule to end three years of political turmoil and revive an economy stuck in its worst slump in two decades.
Share volume is up 159 percent 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 Defense Minister Abdel-Fattah al-Seesi’s possible presidential bid. The benchmark EGX 30 Index rose 18 percent in 2014, 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 yesterday, 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 Center for Political and Strategic Studies in Cairo, said by phone Feb. 10.“The fact is we’re weeks away from a Seesi presidency whether we like it or not. Locals realize 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.”
Prime Minister Hazem El-Beblawi’s government resigned this week, adding to speculation al-Seesi is approaching the formal announcement of his candidacy. Outgoing Housing Minister Ibrahim Mahlab, a member of Mubarak’s dissolved National Democratic Party, according to local media reports, has been tasked with forming a new government.
The benchmark index retreated 0.4 percent to 7,998.3 at the close in Cairo today, paring its gain to 77 percent 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-percent surge over four months in 2009, and compares with an 8.4-percent increase for the MSCI Emerging Markets Index over the past eight months.
“The market sees the candidacy of al-Seesi as pointing toward political stability,” Dubai-based Rami Sidani, who helps manage about $800 million at Schroder Investment Management Ltd., said by phone Feb. 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. It has also played a role in quelling unrest. When Muslims and Christians clashed south of Cairo in March 2011, leading to the burning of a church, the military rebuilt it. When a bread shortage sparked nationwide protests in 2008, the army fired up its ovens to plug the gap.
The generals sent out buses in Cairo yesterday, driven by uniformed conscripts, to cover for hundreds of government drivers on strike for higher pay, according to the army spokesman’s official. Almost two-thirds of current provincial governors and heads of vital economic institutions such as the Suez Canal Authority are senior military officers.
Al-Seesi, a member of the country’s top military council under Mubarak’s leadership, was promoted to Defense Minister by the Islamist Mursi before ousting 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.
Some of the market’s biggest companies have soared past their pre-2011 revolution levels. Commercial International Bank Egypt SAE, the country’s largest listed lender hit a 17-year high earlier this week. 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 percent, beating analyst estimates.
Egyptian stock valuations are approaching those in the Persian Gulf, which has been relatively insulated from regional political turmoil. The average price-to-earnings ratio of stocks on the EGX 30 is at 15.1 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 81 today. A reading of more than 70 on this index may signal that securities are poised to decline.
“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 phone Feb. 12. “The market is being influenced by retail investors and optimism about stability that presidential elections may bring.”
MSCI Inc. 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 6 percent premium to official prices.
The military’s assumption of more political responsibilities may also further destabilize the country. Egyptians came out in mass protests in 2011, which at times turned violent, against what they saw as the army’s mismanagement of domestic security and the economy in the months following that year’s revolt. Dozens were killed in the clashes that forced the EGX 30 below 3,600 points in December 2011, almost a three-year low at the time, and the yield on the government’s benchmark 5.75 percent Eurobonds due in 2020 to surge over 8 percent the same month. The yield was at 5.58 percent today, the lowest in more than a year.
Still, higher prices and currency risk haven’t stopped the biggest investment banks from boosting ratings. Goldman Sachs Group Inc. raised CIB to buy from neutral on Jan. 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 Co., 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 percent of total traded value in January compared with 79 percent in 2013, Egyptian Exchange data shows. Non-Arab foreign-investor participation slumped to 6.3 percent in the month from 14 percent last year.
Economic growth has been tepid since Mursi’s overthrow. Gross domestic product rose at a 1 percent pace in the quarter that ended Sept. 30, and may have accelerated to 2 percent in the following three months, according to former Planning Minister Ashraf El-Arabi, down from a 6.2 percent annual average in the last five years of Mubarak’s rule. Inflation has remained above 10 percent over the last five months.
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 percent, 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 Feb. 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 Feb. 17, the lowest since January 2011, before advancing to 13 today, according to data compiled by Bloomberg. That compares with 34 on Aug. 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 Feb. 10. “It may not be in the best interest of democracy, but this is how people are reacting to the instability they’ve seen.”
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