The Egyptian stock market’s main EGX30 Index dropped by more than 3.6 per cent on Monday, its largest single-day loss since the Russian war in Ukraine started, pushing its losses since the beginning of the year to 27.2 per cent.
The index dropped to less than 10,000 points, its lowest level since 2016. Market capitalisation has lost about 18.5 per cent since the beginning of the year to reach about LE623.7 billion.
“The market is impacted by global events and the resulting serious economic crises in the global economy,” explained Mohamed Maher, CEO of Prime Holding. The intense sell-offs in the Egyptian market, especially by foreigners, stem from worries about rising prices worldwide and increasing interest rates, he explained.
The stock market witnessed heavy sell-offs by foreign investors during the first half of this year, amounting to LE10 billion, with foreigners’ transactions representing 18.9 per cent of the overall market.
Maher said the market was in need of injections of new liquidity to compensate for the losses. The Central Bank of Egypt (CBE) had promised to support the bourse with LE20 billion in 2020 to cushion for losses as a result of the Covid-19 pandemic, but this had never happened, he said.
“Implementing these decisions could have injected new liquidity and compensated for the exit of foreigners,” he argued.
He said that at present there was little to attract new investors to enter the stock market, especially given the capital gains taxes scheduled to be implemented at the beginning of the new fiscal year.
The flight of foreign investors increased in pace after the US Federal Reserve increased interest rates to meet rising inflation in the US. This led to a drop in daily trading values in Egypt to levels of LE300 to LE400 million.
The Federal Reserve raised interest rates by 0.5 per cent after the outbreak of the Ukrainian-Russian war, which increased investor interest in the dollar. Another interest rate hike of 0.75 per cent in mid-June led to more money from investments in global markets being redirected to investing in dollars.
The value of foreign sales on the Stock Exchange over the past six months has amounted to LE10 billion, with net sales of LE2 billion in June alone. Maher said that the government’s plan to begin privatisations will not bear fruit unless large offers are made at attractive prices to lure investors back to the stock exchange.
Maher, whose company was in charge of offering shares in the Ghazl Al-Mahalla Club, said the reason why the subscription had fallen short was that there was a maximum limit for purchases. The decision to extend the subscription until August would help, he added.
A decision was made to extend the subscription of this public offering until 13 August due to low interest. Originally, it was supposed to close on 1 July, but it was extended by six weeks due to demand not exceeding 10 per cent of the offered shares.
It is expected that the maximum subscription per investor will rise to 15 million shares instead of the current two in order to attract larger investors.
Minister of the public business sector Hisham Tawfik told the Yahdoth fi Misr (Events in Egypt) television programme last week that the original maximum quota was not attractive to investors who want a larger share.
Wael Ziada, president and founder of the Zilla Capital Investment Company, said the Egyptian market was reflecting global economic conditions. The low trading volume on the stock market was due to “dysfunctional policies” that have been in place for some time, he said.
But he added that the retreat on the Egyptian market was much less than that in other emerging markets because stock valuations in Egypt were lower than their counterparts elsewhere.
Amr El-Alfy, head of research at Prime Investment, said the financial market crisis had begun with the Russian war and had led to a reluctance by foreigners to invest in the emerging markets. There was also concern about the devaluation of the Egyptian pound, which would lead to a drop in profits when converted into dollars.
With the devaluation of the pound, interest rates had risen, El-Alfy explained, increasing the cost of the debt borne by the state and putting pressure on the currency. This had led to a reluctance by foreigners to invest in the market when interest rates were simultaneously increasing in the US.
Egyptian stock market indices dropped significantly during trading in the second quarter of this year between April and June amid continuous sales by foreign investors.
El-Alfy said there were also other investment tools, such as the 18 per cent certificates of deposit recently offered by the National Bank of Egypt and Banque Misr, that encouraged individuals to abandon the stock market where returns could be subject to sharp drops.
He believes the current retreat in the financial market will change direction once the government announces a new loan agreement with the International Monetary Fund (IMF), expected in the last quarter of this year.
El-Alfy expected that the government will postpone its public-offerings programme until market conditions improve.
But Maher believes now could be a good time for investors to make a profit on the stock market because of the low prices, provided they are long-term investors who can wait for at least a year before thinking about selling.
*A version of this article appears in print in the 7 July, 2022 edition of Al-Ahram Weekly.