Mixed signals from the Bourse

Sherine Abdel-Razek , Monday 18 Sep 2023

Egypt’s main stock index hit its highest ever level twice during the last three weeks, but this does not tell the whole story about the market’s performance.

Mixed signals from the Bourse
EGX30 gained 35 per cent since the beginning of 2023


Egypt’s main stock index the EGX30 that tracks the performance of 30 listed blue-chip stocks exceeded the 19,000-points threshold last week, its highest ever level. It followed another record of 18,500 on 23 August.

The levels mean that the index has gained 35 per cent since the beginning of 2023, but even so some observers have received the news with caution.

“It is good news, but we cannot separate it from the weaker Egyptian pound and the record high inflation, as both are the main culprits behind the increase in the index,” said Sherif Sami, an investment and financial markets adviser and former head of the Egyptian Financial Supervisory Authority (EFSA), the stock market regulator.

The Egyptian pound has lost almost 60 per cent of its value during the last year, driving inflation rates to record highs of 37.4 per cent in August from 36.5 per cent in July.

According to the economic literature, falling currencies affect stock markets by making the currency less attractive to investors, which can create greater demand for stocks. Investors tend to buy more stocks when inflation increases to hedge against the rise in prices.

Amr Hussein Elalfy, head of research at Prime Securities, agreed with Sami that the record highs had come on the heels of several rounds of devaluation of the Egyptian pound in late 2016, early and late 2022, and early 2023.

Since 3 November 2016, the day before the first devaluation, the pound has lost more than 70 per cent of its value against the dollar, Elalfy said.

However, he said that when measured in dollars the story is different. The EGX30 in dollar terms reached its highest ever level on 5 May 2008 just a few months before the beginning of the global financial crisis.

It has never approached this level since then, Elalfy wrote on the online financial platform Borsagy.

“Currently, the EGX30 index is 73 per cent below its all-time high in dollar terms. Not only that, but the index is still down by 39 per cent from its level on 3 November 2016,” he wrote.

Another indicator that the record high does not reflect is the fact that in 2008 the Egyptian Stock Exchange had an average daily trading volume of LE2 billion, equivalent to more than $360 million at the time.

In 2023, the market has also averaged LE2 billion, but this is now equivalent to only $65 million, Elalfy said, adding that the average daily trading volume in the market after more than 15 years is down by more than 80 per cent.

However, Sami said that a more accurate indicator of the index’s performance would come from comparing its level year on year. He said that doing so would reveal that the index had gained 89 per cent in pound terms when compared to September 2022.

“This says that many of the blue chips constituting the index were resilient to all the economic challenges last year, and companies like Al-Sewidi Cables, the Talaat Moustafa Group, and the Commercial International Bank have succeeded in realising profits against all the odds,” Sami said.

It also means that when the inflation rate that is hovering around 40 per cent is deducted, those who invested in the Bourse a year ago have realised almost 50 per cent gains on their holdings.

“There is value in the Stock Exchange for those who kept their investments throughout last year,” Sami noted, adding that such a 50 per cent return not only protected the purchasing power of those investing in the market, but also made market investments very lucrative when compared to the available alternative of fixed-income investment instruments.

The alternative investments are treasury bills that yield 25 per cent before deducting taxes and 20 per cent after taxes. There are also bank certificates of deposit that in some cases yield 19 to 22 per cent annually.

“So, despite the fact that the above-mentioned investments are risk-free and have high yields, the index realised higher profits,” Sami said.

Elalfy agrees that the market is attractively priced, but noted when looking at the market’s P/E multiple (the ratio of a stock’s price to its earnings) in May 2008, November 2016, and today, it is undervalued.

“The market today is still roughly at half the valuation it was 15 years ago, currently trading at a P/E of 8.2 times versus 15 times in May 2008,” he said.

According to Elalfy, if the current market valuation is compared to the levels before the devaluation of the Egyptian pound in late 2016, it is 35 per cent lower than the P/E multiple of 12.7 times at which it was trading at that time.

“Obviously, market conditions dictate new valuation levels, but at current valuation levels, Egyptian stocks are a far cry from being traded at all-time highs,” he said.

The other way to look at it is to say that being cheaper means being more attractive, but what is limiting foreign investment from pouring into the market is the fear of further devaluations of the pound, Samy said.

“A lot of foreign investors look at the exchange rate used in the Non-Deliverable Forward [NDF] contracts on the pound and the Egyptian Global Depositary Receipts [GDRs] traded in London and find that the implied exchange rate is much higher than the official rate and thus expect further devaluations and hold back their investments,” he commented.

On the other hand, according to Stock Exchange data local investors have been pumping investments into the market over the past 12 months, looking to hedge against currency weakness and record inflation.

* A version of this article appears in print in the 14 September, 2023 edition of Al-Ahram Weekly

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