Egypt’s bourse rally endures despite shaky foundations

November 27, 2024, 7:55 AM

A trader works at the Egyptian Exchange. The rally on Egypt's bourse may continue if company valuations remain cheap

Egypt’s share surge began in 2022
Coincides with pound devaluation
Greater non-institutional involvement

Cairo’s share index has trebled over the past two years as increasing numbers of Egyptians invest in stocks to preserve their wealth in response to double-digit inflation and a declining national currency.

Company valuations remain cheap compared with regional peers, experts say, and so the market rally in Egypt may endure.

However, the absence of foreign institutional investors means the bourse’s upswing has fragile foundations and could reverse if sentiment sours.

Egypt’s stock index has retreated slightly since mid-November but is up about 17 percent over the past 12 months, extending a rally that began in late 2022.

This surge broadly coincides with a multistage devaluation of the Egyptian pound, which is down 60 percent versus the dollar since late October 2022; Russia’s invasion of Ukraine and the start of US interest rate rises, which both began that year, led Western institutional investors to repatriate money from emerging markets.

This intensified a foreign currency shortage in Egypt, weakening the pound, which in turn swelled headline inflation to a peak of 38.0 percent in September 2023 from just 4.1 percent in April 2021.

In response, ordinary Egyptians switched from bank savings accounts to other assets including local stocks, real estate and gold, says Ahmed Abou El Saad, CEO of Azimut Investments – Egypt.

He also highlights how fintech investment platforms gained traction, giving retail investors a more straightforward means to trade stocks and invest in mutual funds. Consequently, the number of people active in the market increased substantially.

El Saad describes the first leg of the bourse rally as the “dollar game”, which persisted until early 2024 when a new strategy emerged: the Ras El Hekma play. This refers to Cairo’s $35 billion agreement with an Abu Dhabi sovereign fund to develop that stretch of Egypt's coastline into a vast real estate and tourism project.

Narrower than the first phase of Egypt's bourse rally, recent gains have been more concentrated in industries and stocks most likely to benefit from the Abu Dhabi deal and include companies in the real estate, construction and infrastructure sectors, explains El Saad.

Retail investors have also sought to benefit from sovereign Gulf investments in Egyptian companies, says Wael Ziada, founder of Zilla Capital, a Cairo-based investment bank.

For example, the stock prices of Commercial International Bank and Elsewedy Electric have roughly doubled since Abu Dhabi entities bought into the two companies in 2022 and 2024 respectively.

So, Egyptians are investing in other companies that could become the next takeover targets for Gulf sovereigns, Ziada explains.

“Corporate earnings do justify the market rally,” says Ziada. “Egypt is a retail investor-driven market and retail investors are buying in such a cheap market. So even though they may be buying for the wrong reasons they’re buying the right things.”

That is because the stocks in which Egyptians are investing trade at a price-to-earnings ratio (PE) of only about 5 to 6, Ziada explains. Similarly, El Saad gives the same estimate, also noting some banks have a PE of 3 to 4 and that some major industrial companies trade at a PE of less than 2.5.

“Valuations aren’t stretched at all,” says El Saad. “On the contrary, the Egyptian market stands as one of the cheapest, if not the cheapest in the region.”

The market rally has further to run, although the absence of foreign institutional investors means its foundations are fragile, says Ziada. “Local institutions sometimes display the same investment patterns and behavior as retail investors.”

“In an environment where inflation is eroding your purchasing power, the allure of easy profits becomes even more compelling,” says Ziada. “You can make a quick buck without having to do much thinking, which strengthens the herd mentality.

“There's a lot of upside potential and the outlook in Egyptian pound terms remains solid.”

El Saad says the short-term market outlook will depend partly on how United Bank’s initial public offering fares as well as the company’s stock performance after listing on the Cairo exchange. United Bank should be the first of several government-run companies to float as part of a renewed privatisation push.

Yet a further bourse rally in Egypt is far from guaranteed and will depend on investor sentiment, El Saad warns.

“I expect 2025 to be a challenging year,” adds El Saad. “What will determine the market direction is the quality of the companies that are floated and how successful Egypt is in attracting foreign investors. Ras El Hekma was just a painkiller.”