Bloomberg News

Egyptian Stocks Go to First From Worst as ING Sees Bear Rally

February 14, 2012

Feb. 1 (Bloomberg) -- Egypt’s benchmark stock index, the worst performer in emerging markets last year, is leading gains in 2012 after the nation formed its first parliament since the ouster of Hosni Mubarak and started talks with the International Monetary Fund.

The EGX 30 Index jumped 28 percent in January, the best monthly gain in seven years and the biggest among 72 world stock gauges tracked by Bloomberg. Orascom Telecom Holding SAE, the Cairo-based mobile-phone company that split into two units last month, led the rally with a 110 percent surge.

Egypt’s parliament convened on Jan. 23 for the first time since the end of Mubarak’s 30-year rule as the government negotiated a $3.2 billion IMF loan. While stock analysts tracked by Bloomberg predict the EGX 30 will rise another 18 percent in the next year, ING Investment Management says shares may resume declines as policy makers haven’t produced plans to revive the economy. The EGX 30 is valued at 16 times earnings, a 37 percent premium over the MSCI Emerging Markets Index.

“I don’t think we are out of the woods yet,” Fadi al Said, the head of equities at ING Investment Management (Dubai) Ltd., whose parent company oversees about $434 billion worldwide, said in a Jan. 30 e-mail. “My guess is this rally is a bear-market rally.”

10-Year Low

The EGX 30 tumbled 49 percent last year after the uprising was followed by protests against the country’s ruling military council, which took control of the most-populous Arab nation. Economic growth slowed to 1.8 percent in the year ended June 30, the weakest pace in at least 10 years. The tourism industry contracted 10.4 percent in the three months through September, while investment plunged 18 percent, government data show.

The Egyptian equity gauge rallied from a 34-month low on Dec. 28 as the country completed parliamentary elections, the government said Jan. 16 that an agreement with the IMF may come within weeks and lawmakers took their oaths in Cairo. Better- than-estimated economic data in the U.S and new measures from the European Central Bank to bolster the region’s lenders also boosted investor sentiment.

The EGX 30 gained 0.9 percent at the 2:30 p.m. close in Cairo. The MSCI emerging-market index rose 0.5 percent, after gaining 11 percent in January.

“The global backdrop is constructive,” Ibrahim Masood, who helps manage about $400 million at Mashreqbank PSC in Dubai, said by e-mail Jan. 30.

Currency Concern

Egypt’s currency and domestic government-debt markets have failed to rally this year. The Egyptian pound is little changed since the end of December at 6.0269 versus the dollar, according to data compiled by Bloomberg. Twelve-month non-deliverable forwards for the currency were at 7 per dollar today, reflecting bets the pound will drop about 14 percent over that period.

Average yields on one-year government bills rose to 15.9 percent in January, the highest since Bloomberg began tracking the data in 2006. The government expects the budget deficit to reach 8.7 percent of gross domestic product this year.

The loan from the IMF isn’t enough to cover Egypt’s external financing gap, according to Royal Bank of Scotland Group Plc. Egypt’s foreign-exchange reserves dropped to $18.1 billion in December from $36 billion a year earlier.

The government needs to bolster its financial strength “to alleviate pressure on the currency, a major concern for foreign investors,” Ali Khan, the London-based head of Middle East and North Africa equities sales at RBS, said by e-mail Jan. 30.

Bullish Analysts

Equity analysts have bullish outlooks for EGX 30 companies. The index will climb to 5,538.48 in the next 12 months, the highest since June, according to the average of about 200 share- price estimates compiled by Bloomberg. Orascom Telecom, which split to facilitate a merger between its parent Wind Telecom SpA and Russia’s VimpelCom Ltd., may climb 24 percent to 4.67 pounds, according to the average four analyst price estimates.

An agreement with the IMF may boost investor confidence and spur further gains in equities, according to Rami Sidani, the Dubai-based head of Middle East and North Africa investments at Schroder Investment Management.

“We expect a lot of volatility whenever approaching important milestones,” Sidani said in a phone interview Jan. 31. “Every time things go well around one of these important events, we’ll see confidence restored and more buying in the market.”

Trading on the Egyptian Stock Exchange increased to a daily average of about 84 million shares in January, up from 53 million in the final three months of 2011. Last month’s rally boosted the price-to-earnings ratio on the EGX 30 to 16 from 12 at the beginning of the year, data compiled by Bloomberg show. The Egyptian gauge’s 37 percent premium over the MSCI emerging- markets index compares with an average gap of 7 percent during the past five years.

“For the long term, Egypt offers a story with great potential,” said ING’s al Said. “For the short- to medium- term, it will continue to be a headline and event-driven market.”

--Editors: Claudia Maedler, Laura Zelenko.

To contact the reporters on this story: Michael Patterson at mpatterson10@bloomberg.net; Zahra Hankir in Dubai at zhankir@bloomberg.net; Ahmed A Namatalla in Cairo at anamatalla@bloomberg.net

To contact the editor responsible for this story: Claudia Maedler at cmaedler@bloomberg.net


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