Egypt seen pressured; Gulf investors worried

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CAIRO/DUBAI: Egypt’s market looks set to be buffeted again next week by the political turbulence that weighed on the benchmark index, pushing it down more than 7 percent in the first three days of this week.

Egypt’s benchmark EGX 30 index ended Thursday up 0.1 percent after a steep decline earlier in the day.

Protesters have been camped in Cairo’s Tahrir Square since Friday, angry at what they consider to be too slow a pace of reform by the ruling military council.

The protest has increasingly targeted the generals running the country and is one of the longest since it took over from former leader Hosni Mubarak following mass protests against rising prices, poverty, unemployment and years of authoritarian rule.

"Investors will be watching local political developments closely, while levels of foreign risk appetite will also be driven by fiscal and debt developments in the US and the Eurozone," said Simon Kitchen, strategist for EFG-Hermes.

Analysts and traders said they saw few signs the political turbulence calming down in coming days, particularly after protesters rejected pledges made by Prime Minister Essam Sharaf on Monday as inadequate.

In a televised address, Sharaf promised a cabinet reshuffle within a week, a move some investors fear may trigger further instability.

"There’s a lot of nervousness with various protests going on. The market weakness is likely to continue," says Michael Millar, head of research in Naeem Brokerage.

"We expect to see continued volatility, low foreign participation and low volumes ahead of the elections."

The benchmark index closed at 4,972 points on Tuesday, its lowest since May 10.

Commercial International Bank (CIB), Egypt’s biggest private bank by assets, fell to its lowest since Dec. 1, 2009. The stock is seen by investors as a hedge against unrest.

"The sell-off has been across the board. And the extent of some moves in big caps like CIB has surprised. The market even seems to be ignoring natural safe havens such as telecoms and domestic demand plays," said Millar.

Hashem Ghoneim, vice President of Pyramids Capital, recommended investors eye dollar-denominated stocks to whether the turbulence, such as Maridive and Oil Services and Egypt Kuwait Holding, adding Telecom Egypt was another safe-haven pick.

Gulf results

Gulf firms’ quarterly results will take a back seat to developments in Europe as investors worry about whether Italy and Spain will become the next victims of the euro zone debt crisis and the macroeconomic fallout from such an event.

Corporate results issued so far have done little to spur significant buying with volumes remaining seasonally low. Gulf Arab markets are traditionally quiet during the summer with many market participants on holidays and, this year, reducing positions ahead of the Muslim holy month of Ramadan.

"Earnings season is not exciting anybody right now. Nobody is taking a view one way or another," says Akram Annous, MENA strategist at Al Mal Capital. "Everything that’s going on is very international."

While the Gulf is marked by flat trading, there are pockets of regional opportunities.

"Some people are excited about Palestinian equities — they have high dividends and are pretty cheap on a PE basis. You also have increasing interest on Iraq’s growth story, but these are very small markets with low liquidity," Annous added.

Saudi Arabia’s banking sector will attract interest amid growing investor confidence that the kingdom’s battered banks are rebounding from a bout of bad loan provisioning.

Al-Rajhi Bank, the country’s biggest Islamic lender, posted a 3.6 percent rise in second-quarter profit on Monday and Riyad Bank’s profits surged 9 percent, beating estimates.

"Global weakness is not helping, even though we have fantastic results," said a Riyadh-based fund manager.

"People are a lot more confident on banks; they will see better buyers now."

While the Saudi petrochemical sector has been performing well this year, with the index up 3.3 percent so far in 2011, bank stocks have lagged. The index is down 7.3 percent.

"Banks have been treading water since the Algosaibi scandal, but now they are seeing better volumes because people are expecting better results," the fund-manager added.

A debt implosion at two Saudi conglomerates in 2009 — Ahmed Hamad Algosaibi & Bros and Saad Group — forced banks to book provisions against the firms.

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