Analysis Finance Egypt shines as Mena’s top performing bourse in 2023 By Matt Smith October 18, 2023 Reuters/Mohamed Abd El Ghany A trader at the Egyptian stock exchange in Cairo. Qatar has already invested over $5.5bn in Egypt's financial, real estate and energy sectors 96% of trading by Egyptians $48.6bn market capitalisation Hope for IMF review Egypt’s benchmark stock index soared to another all-time high this week, extending a prolonged rally as investors bought equities to hedge against soaring inflation and a fragile Egyptian pound. The EGX30 Index is the Middle East and North Africa region’s top performer in 2023, rising 51.2 percent to October 17, although in dollar terms its gains are a more modest 5.0 percent this year. Its current market capitalisation is 1.50 trillion pounds ($48.6 billion), bourse data shows. Egypt issues $500m of green panda bonds in China Moody’s downgrades ratings of five Egyptian banks Egypt to lower commodity prices by up to 25% “In nominal terms, the stock market has delivered high returns, but adjusted to the Egyptian pound weakness, the gains are nothing extraordinary,” said Allen Sandeep, director of research at Naeem Holding in Cairo. Egypt has accelerated the pound’s devaluation versus the dollar following Russia’s invasion of Ukraine, which spurred foreign investors to sell pound-denominated government debt and exacerbated a longstanding foreign currency shortage. The pound’s official rate versus the dollar is 30.8, down from 15.7 at the start of 2022. In early 2015 it was valued at 7.6 to the dollar. The currency’s decline has sent consumer prices soaring, with Egypt reliant on commodity imports. Worries about foreign currency shortages and the pound’s fragility have also led foreign investors to quit Egypt’s bourse. On Tuesday, Egyptians accounted for 95.8 percent of stock trading, non-Egyptian Arabs 3.8 percent and other foreigners 0.5 percent. Hasnain Malik, managing director of Emerging & Frontier Markets Equity Strategy at Tellimer in Dubai, said foreign investors have “zero interest” in investing more money in Egyptian stocks until the country fixes the pound’s problems. That will mean “devaluation, at least, and a move to a freer float, hopefully”, said Malik. On September 28, global index provider FTSE Russell announced it may downgrade Egypt to “unclassified” from “secondary emerging” market status due to foreign investors’ difficulties in repatriating money from the country. Local equity investors – retail high net worth and institutional – have mostly targeted the stocks of companies that benefit from a weak pound. These include export-oriented companies such as fertilizer and chemicals manufacturers and industrial producers, plus banks which profit from their investments in high-yielding government debt. To September 30, the banking sector stock index was up 40.4 percent, industrial goods had risen 91.3 percent, real estate 41.1 percent and energy and support services 49.8 percent, according to Kuwait’s Kamco Invest. Trading activity has also soared. Daily average trading was 407.9 million shares in the first nine months of 2023. That compares with 116.2 million shares for full-year 2022. “Investors are buying stocks as a hedge against a weaker local currency and high inflation,” said Sandeep. Annual inflation hit 38 percent in August, its highest level this century and nearly triple that of a year earlier, central bank data shows. In response, the central bank’s benchmark interest rate has jumped to 19.25 percent from 9.25 percent in March 2022. Equities constitute only a “miniscule” proportion of Egyptians’ disposable wealth and income, said Sandeep. “It’s a fraction of the money invested in real estate, bank deposits, gold, and Egyptian government debt,” said Sandeep. Regarding stocks, Tellimer’s Malik also foresees further short-term gains for Egypt’s exporters including electrical equipment manufacturers, which will likely outperform companies that rely on domestic consumer demand. Should Egypt’s macroeconomic environment improve, banks and real estate will likely prosper, Malik added. Real GDP will grow 4.1 percent this year and 4.2 percent in 2024, S&P Global forecasts. IPOs and IMF loans In August, the government said it hoped to raise $5 billion from selling stakes in state-owned companies from October 2023 to June 2024, local media reported. This is part of a wider plan to part-privatise 35 government-run businesses. Should the asset sales, which include initial public offerings, be conducted at a faster pace, this would boost the stock market further, said Sandeep, because it would indicate an expanded deal with the International Monetary Fund was getting closer. The IMF in December approved a $3 billion, 46-month loan programme for Egypt including an immediate payment of $347 million. The country is in talks to increase the loan to $5 billion. The IMF has backed Egypt’s plan to privatise state-owned businesses and transition to a “flexible” exchange rate. Egypt owed the IMF $21.9 billion as of March 2023, central bank data shows. Investors had anticipated the IMF’s next consultation would occur by the end of the year and recent media reports claim the review’s dates could be announced this month. That propelled stocks higher this week, with investors confident there will be a further, official devaluation of the pound as a prelude to the review, Sandeep said. “We still see some upside in stocks that are export-oriented, have zero debt, decent cash and pay regular dividends, but we would never suggest an index-oriented view on the market at current levels,” added Sandeep. Yet Tellimer’s Malik remains downbeat, in an October report describing returns on Egyptian equities since 2013 as “desultory” in dollar terms. “For foreign investors in local currency assets like equities, it is fair to question why should the next decade be any different from the last?” he added.