Outlook remains negative for Egypt's stock exchange, analysts say

Karim Hafez , Tuesday 26 Mar 2013

Two years after Egypt's January 25 Revolution, the stock market remains weak and 'undesirable' for future investors due to political and economic uncertainty

The Egyptian exchange is going through tough times (Photo: AFP)

Egypt's stock market has received several hard blows nuanced by an apparent exodus of foreign investors since President Mohamed Morsi started his term last June.

The market is still unable to recover as the government's economic policies and current political stalemate make the stock market 'undesirable' for future investments.

Egypt's main benchmark index, the EGX30, fell 1.95 percent to 5,129 points on Tuesday. The broader EGX70 index also saw a significant decline by 1.58 percent.

Market volume reached a meagre LE226 million by the end of Tuesday's session, showcasing the recent weak condition of the market.

Market turnover has not been able to pass the threshold of LE350 million for the past three months, proving market activity has reached an all time low.

The stock market dropped by a cumulative 6.1 percent since the beginning of 2013 to reach 5, 219 points, with capital experts blaming the lack of liquidity in the market and the government's failure in offering investment incentives.

"After the revolution there was hope for a better future and investors were betting on the fact that presidential elections would bring stability to the country," Walaa Hazem, fund manager at HC securities, told Ahram Online. "The case today, however, is completely different, as the uncertain future is driving local and foreign investors out of the market, despite the relative low price of shares."

Blue-chip stocks Orascom Construction Industries (OCI) and Commercial International Bank (CIB), which generally lead the market's orientation, have significantly lost value since the beginning of 2013.

OCI, Egypt's biggest publicly traded company, saw its share reach a price of about LE232 per share, almost an 11 percent change from the beginning of the year. Meanwhile, CIB is at a price of LE31 per share, which is a significant 20 percent decline year-to-date.

The EGX70 dropped by 6.71 percent since the beginning of the year, with once booming sectors, such as pharmaceuticals and food and beverages suffering deep losses.

"The real estate sector in Egypt, for instance, is booming and has the potential to boost the market as a whole; however, this is not happening because of the uncertainty looming the market," said Amr El-Alfy, research director at CI Capital Cairo. The real estate sector is one of the fastest growing in Egypt despite an overall slowdown in the economy. It increased by 3.8 percent while the economy, as a whole, grew by 2.2 percent in the second quarter of the year 2012/2013.

Capital gains taxation

Market analysts claim a capital gains tax on market transactions and the apparent targeting of large Egyptian private sector companies prove that the future of investment in Egypt does not look positive.

"The direct clash the government triggered with OCI, sends the message that all investors that chose to place capital in Egypt are vulnerable and could see their investments threatened," Hazem explained.

OCI, the largest publicly traded company in Egypt, has recently been hit with a travel ban imposed on founder of OCI Onsi Sawiris and company CEO Nassef Sawiris for alleged tax evasion charges for a deal sealed back in 2007.

"Retroactive decisions such the travel ban on Onsi and Nassef Sawiris will simply lead further investors to exit the market. This is not the sound investment environment President Mohamed Morsi promised at the beginning of his term," Hazem added.

"Unfortunately the real victim of the political conflict between the Brotherhood and the secular opposition is the economy and the stock market, and the government has completely failed in regaining international trust in the stock market," explained El-Alfy.

The Egyptian government announced that all shareholders and investment funds that make capital gains from Qatar National Bank's (QNB) bid for Cairo-based National Societe Generale Bank (NSGB) will face a 10 percent tax.

"Imposing a capital gains tax on big market transactions, such as the NSGB bid or the Lafarge deal, made by Orascom back in 2007 seems to be the future trend. This governmental policy will probably have negative implications on the stock market's future," asserted El-Afly.

Investors and market traders are still waiting to see governmental steps that would attract investors and boost confidence into the Egyptian stock market once again.

"Without political stability and an end to the current uncertainty the country is facing, the stock market will not recover or attract investors," said Hazem.

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