CAIRO: Witnessing a 25 percent rise since the start of the year, Egypt’s benchmark EGX 30 index has surged surprisingly in January, despite ongoing political uncertainty and economic turmoil.
The main index’s year-to-date change is at a high of 25.08 percent after losing more than 40 percent in 2011. The EGX 30 finished off last week with a 7 percent growth, its highest in months.
Financial analysts, however, argue that these gains are not sustainable, due to their “shocking” disconnect with Egypt’s many unsolved economic issues.
“It’s unusual for a market to rise quite so sharply when there are so many actions that are required to be taken to turn the economy around. Egypt has gone up about 25 percent, while all the other regional markets, like Tunisia, are up just by a few percent,” said Angus Blair, a financial analyst.
After brief clashes between unknown assailants and protesters demanding the fall of the ruling military council outside Maspero on Sunday, the EGX 30 slid slightly on Monday, ending the day 0.10 percent lower at 4,530.73 points.
Last week, however, after protests on the first anniversary of the January 25 uprising passed peacefully, the market made significant gains, in line with its upward trend this month.
As investors seemingly regain confidence in the market, officials from the EGX and the Egyptian Financial Supervisory Authority (EFSA) are mulling lifting trading restrictions in place since March 2011, when the market reopened after an almost two-month closure.
“They are currently discussing lifting the trading restrictions gradually…in order to avoid any abnormal hike in the market’s trading,” said a media representative from the stock exchange.
But the stock market, typically seen as an indicator of the general state of the economy, is not exactly reflective of the current economic climate.
Egypt’s foreign reserves have fallen to $18.1 billion by the end of December, decreasing at a rate of about $2 billion a month over the year. As Blair explained, that equals about eight weeks worth of reserves.
“The foreign reserves particularly, need to be turned around,” he said. “Suez Canal revenues are slowly coming in, remittances are fine, which is good, but tourism and foreign investment have been dreadful.”
Tourism took the largest hit in 2011 and does not seem to be recovering this year as much as the stock market. Official figures said the sector lost 30 percent last year, though many are skeptical of this low number.
A heightened sense of xenophobia, propagated by state media on the back of the ruling military council’s claims that “foreign hands” are to blame for upheaval across the country, is further compounding matters.
Coupled with that is a recent travel ban on several American NGO employees that made global headlines as well as a crackdown on NGOs accused of illegally acquiring foreign funding.
“Tourism and FDI are needed for Egypt to quickly recover, and that is not happening with stories about Americans being arrested or not allowed to leave the country,” said Blair.
Several analysts have pointed out that the increased trading activity in the market is not necessarily attributed to investor confidence, but rather to unusually low share prices, which is encouraging people to invest in bargain stocks.
“With the price of stocks going down, people want to buy more because to them it is like buying cash. They expect these stocks to go up soon, and they are playing on this risk,” said Tarik Salama, a financial consultant who focuses on the stock market.
Telecom shares, for example, which have been among the best performing on the market, are currently undervalued.
Mobinil, one of three telecom operators, saw stocks rise almost 7 percent on Monday, despite taking a hit last year. Its closing price was LE 97.
“The good performance of the telecom shares … all started after the anniversary of the revolution,” said Ahmed Adel, telecom analyst at Naeem Holding. “Everyone was worried that there would be violence or maybe another start of the revolution.”
Mass marches took place on Jan. 25 and 27, and protests are ongoing in Tahrir Square and at Maspero, along with sit-ins, but have been peaceful in nature, without any confrontations with security forces. Gains were also made after Egypt’s new parliament was seated on Jan. 23.
Investors have targeted telecom stocks, one of the most “attractive” sectors in Egypt.
“The telecom sector was expected to see a rise this quarter because trading volume was limited after the revolution, nobody was injecting money in the market, and the 2011 end results were not that good due to the cutting off mobile services during the revolution,” said Adel.
“Everybody is expecting 2012 to be good based on the ‘base-year’ effect, any numbers reported this year will look better than 2011,” he added.
Still an improvement in the overall economy largely relies on a swift transition of power to civilian rule — which is what protesters have been demanding — expected by June 2012.
“Performance still depends on the political and economic situation in the country, but most of these shares are undervalued…this is why people are buying now,” said Adel.