Egypt's stock exchange starts off 2019 on wrong foot

After a punishing 2018, Egypt’s stock exchange started 2019 on a downward path amid fears of repercussions from the US-China trade war and the emerging markets crisis.

al-monitor A trader works at the Egyptian stock exchange, Cairo, Egypt, Sept. 20, 2018. Photo by REUTERS/Mohamed Abd El Ghany.

Topics covered

interest rates, foreign investment, emerging markets, egyptian economy, stock exchange

Jan 28, 2019

CAIRO — The Egyptian Stock Exchange (EGX) has been incurring severe losses in 2019, as the Jan. 17 session closed down 3.5 billion Egyptian pounds (around $195 million).

On Dec. 22, several newspapers reported that net transactions on the EGX also revealed heavy losses during 2018, with a market capitalization drop of around 80 billion Egyptian pounds ($4.5 billion), or about 9.7% of the exchange's total market capital of 825 billion pounds ($46 billion) as of December 2017.

However, for the fiscal year that ended in June 2018, Egypt achieved a growth rate of 5.4%, the highest in 10 years, according to Minister of Planning Hala Saeed.

At a Jan. 3 press conference on calendar-year 2018 stock market performance, EGX head Mohamed Farid did not address losses. Instead, he boasted about the exchange's achievements, pointing to four initial public offerings with a combined value of 5.2 billion pounds ($290.5 million) in the first nine months of 2018 and to 24,000 new EGX investors.

Farid also indicated the 2019 EGX agenda includes issuing rules regarding market makers and short selling, updating e-trading platforms, launching a new spot commodity exchange and improving the electronic disclosure system for EGX-listed companies, in both Arabic and English.

Arabfinance Chairman Mohamad Radwa told Al-Monitor, “EGX is not suffering losses due to push factors [such as inflation and low wages] that discourage investors and speculators from dealing with Egyptian markets, but because of recent pull factors [like higher wages] in other markets.”

He explained that the emerging markets crisis had hit EGX hard. “The crisis repelled two types of foreign, Arab and possibly Egyptian investors. The first type is interested in short-term investments. These investors left the EGX to invest in deposits, certificates of investment and treasury bills and bonds with a high interest rate. Emerging markets had raised interest rates to counter their currency decline.”

Radwan went on, “The second type is foreign and Arab investors, specifically those looking for long-term direct investments, who consequently liquidated their stakes in many stock exchanges around the world and shifted to emerging markets to benefit from the declining local currencies in those markets against the dollar. The fall of local currency rates in emerging markets leads to a drop in manpower costs, which makes investments in dollars more profitable.”

This effect has prompted some of these emerging market countries to lift their interest rates on bank deposits, investment certificates, treasury bills and bonds to attract foreign investors seeking short-term investments. Argentina and Turkey are both classified as emerging market countries. Argentina raised its interest rates Aug. 30 from 27.25% to 60%, while Turkey raised its rates Sept. 13 from 17.75% to 24%.

Hassan Kenawi, executive director of HC Securities & Investment of Dubai, noted that in addition to the direct negative effects mentioned by Radwan, emerging markets also experience indirect negative effects. “The issuing of treasury bonds by emerging markets countries in international bond and trading markets prompted Egypt to cancel three bids to sell T-bonds," he said.

“These [Egyptian] T-bonds would not sell against those issued by Turkey and Argentina with very high interest rates. The cancellation of Egyptian bids discouraged some Arab and foreign investors from trading in Egyptian markets, including the EGX," Kenawi told Al-Monitor.

Egypt’s Ministry of Finance canceled the three bids in MarchJuly and September because banks and international markets wanted higher returns. The US dollar T-bond bids would have been worth a total of 7.5 billion pounds ($419 million).

Mohammad Asran, managing director of IFA Securities Brokerage, told Al-Monitor that EGX losses should be interpreted in light of the performance of the international stock markets.

He pointed out that the Dubai Stock Exchange in 2018 saw its lowest performance in five years, and the US markets had their worst showing in 10 years. Asran explained, “EGX was not isolated from the global stock markets that bore the brunt of the economic war between the US and China and the crisis of emerging markets. One may even say that Egypt has withstood crises that took down stronger and more stable stock exchanges.”

Financial market expert Samir Raouf concurred. He told Al-Monitor, “The year 2018 could be divided into two parts, from January to April and from April to December, or until now because of the continuing losses.” He indicated that the first part witnessed a remarkable uptrend in the benchmark EGX30 index from 15,100 points in January 2018 to hit an all-time high of 18,400 points in April 2018.

Raouf continued, “In the second half of 2018, and almost a month into 2019, losses reached as high as 9.7% of EGX’s total market capital amid the ongoing emerging markets crisis and the US-China trade war. These are external factors beyond EGX’s control. However, once these crises are over, EGX will recover its record gains or acquire new pull factors that attract international companies or major Egyptian companies. I expect this to happen soon with the 2019 EGX program, and in light of the government's serious talk about its intention to develop companies in various economic sectors and list their shares on EGX.”

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