When compared to other regional and emerging markets, the Egyptian stock market fared pretty well in 2019.
While other emerging markets suffered due to a strengthening dollar, the local market was relatively resilient for most of the year. The improved economic conditions were supported by improving indices and monetary easing, and the Central Bank of Egypt (CBE) decisions to cut interest rates four times over the year also gave the market a pat on the back.
Egypt adopted a wide-ranging economic reform programme in 2016, and since then the government had been implementing austerity measures including cutting subsidies and introducing new taxes in addition to a set of amendments that saw the currency devalued by 50 per cent.
These changes have generated improved macroeconomic indicators, whether on the growth, external, monetary or fiscal fronts. These helped Egypt when the emerging markets turmoil started in April 2018, and they cushioned the effects of the crises during 2019.
Until September 2019, Egypt was one of the best-performing emerging markets worldwide. The scattered protests that took place in September then triggered sell-offs that stripped the market of some of its gains. The market has regained ground since then, and in the second week of December the market’s growth to year to date came in at 2.5 per cent.
According to Pharos Securities, a consultancy firm, among other emerging markets indices, the Egypt MSCI Index designed by the US investment bank Morgan Stanley to measure the performance of the large and middle capitalisation segments of the Egyptian market massively outperformed emerging market peers in 2019.
The MSCI still looks attractive, as overall earnings per share growth have come in at 15 per cent. Regarding the EGX30, the local index that tracks the performance of the most active 30 shares, this is trading at a 2019 price-earnings multiple of 9.2 times, which means that for each LE9 paid a LE1 profit is realised.
This is 35 per cent above its five-year low of 6.8 times, and it means “the country is currently on much stronger macro grounds compared to five years back,” Pharos said.
However, market capitalisation to GDP is currently below 13 per cent, the lowest in more than 20 years. This is believed to be the result of the lack of new liquidity in the Egyptian capital market and the decrease in the number of active and new listings.
With LE700 million to LE900 million in average daily transactions, the liquidity of the Egyptian market is low, especially since the devaluation of the Egyptian pound in 2016.
While the government’s plan to float stakes in a number of the companies in the public-enterprise sector aims at pumping liquidity into the market, Hisham Tawfik, the minister of public enterprise, said in October he would rather postpone the offerings until the beginning of 2020 out of fears that the Saudi oil giant Aramco offering could suck the liquidity out of the market.
Last year, the government said it planned to sell minority stakes in 23 state-owned companies, including Enppi and Banque du Caire, in an initial phase of privatisations that is part of a plan to raise up to LE80 billion.
After several delays, the government kicked off the programme with an additional 4.5 per cent stake sale in the already listed tobacco monopoly Eastern Tobacco in March, and the plan has been frozen since.
Meanwhile, two private companies saw initial public offerings (IPOs) this year. In late July, the Fawry for Digital Payments Company put 36 per cent of its share capital, worth up to LE1.6 billion, on the bloc. The issue was 30.3 times oversubscribed. Later in the year in early December, a five per cent stake in Rameda Pharmaceuticals was sold to small investors in an IPO, with the remainder offered to private investors.
The public offering was 36.3 times oversubscribed.
The high rate of oversubscription indicates that provided there is a supply of attractive shares there is a demand in the market from private equity groups and foreign investors.
“In 2019, Egypt continued to be a consensus favourite among foreign investors, but this has been reflected in the performance of its biggest stock, [the bank] CIB, not the rest, which are much less liquid,” one leading investment banker based in London told the US financial service Bloomberg earlier this month.
Meanwhile, two important IPOs are scheduled to be offered in the first quarter of 2020, including a stake in state-owned payments platform e-Finance and another in Egypt’s smallest public bank the Banque du Caire.
During 2019, foreign investors were net sellers on the Egyptian exchange during most months, with the exception of August 2019, since they heavily invested in the Fawry IPO.
Egypt introduced a stamp duty of LE1.25 ($0.0744) per LE1,000 in June 2017, then increased it to LE1.5 in 2018. In May, the Finance Ministry cancelled a further increase to LE1.75 planned for this year, saying it would coordinate measures with stock-exchange officials to help the market recover after some big declines.
These measures might include another freeze on the capital-gains tax that was introduced in 2014 but was put on the shelf in 2015 and 2017. There have been suggestions to include a combination of the stamp duty and capital-gains tax in the new tax laws, with the capital-gains tax acting as a ceiling for the stamp duty.
In a step aimed at increasing liquidity, the Egyptian bourse introduced short-selling in the market in December. This means securities can be sold before they are acquired, and it increases market liquidity.
In general, the different sectors of the economy fared well this year, as corporate earnings bounced back to pre-float levels in dollar terms, according to a Bloomberg report.
After suffering due to spiralling inflation, listed companies in Egypt are now reaping the fruit of the floatation, with inflation decelerating rapidly, foreign-exchange reserves at an all-time high, and the economy growing at more than 5.6 per cent this year.
*A version of this article appears in print in the 26 December, 2019 edition of Al-Ahram Weekly.