Against the odds
Despite a regional war and local economic woes, last year gave capital market investors reasons to celebrate. Sherine Abdel-Razek looks at the market's performance during 2003
Source: Cairo and Alexandria Stock Exchange
The biggest news this year was the surprise decision in January to float the pound -- pushing it into a virtual free fall, losing 24 per cent of its value. Less than a month later, the war in Iraq started, triggering fears of regional unrest and local economic losses that were estimated to be in the neighbourhood of $6-8 billion.
However, the floatation and the resultant price hikes which added an unprecedented burden on local business and household budgets turned out to be a blessing in disguise for the market. As for the war, time proved that not only were the projected losses exaggerated, but that the war gave a boost to the economy and the market.
Suez canal receipts increased due to the tolls paid by the military vessels passing through the canal, and the war- triggered increase in oil prices raised both oil exports and the transfers of the expatriates working in oil-rich Gulf countries.
Moreover, the timing of the war favoured the tourism sector. Starting in late March, the war did not affect bookings for most of the winter season, which starts in February and lasts for two months. In addition, the introduction of intensive security measures at summer resorts in Europe and the US following the war made Egypt a more attractive destination during the summer, adding to tourism revenues.
These two supposedly detrimental events added to the market what some observers consider dramatic gains during 2003. This compares well to the relatively slight improvements in the second half of 2002, which witnessed a recovery from the aftermath of 11 September.
Nothing can be indicative of the revival more than the indices. The Egyptian Financial Group's popular index -- EFI -- which includes the 30 most actively traded stocks, gained 120 per cent since March. PAMI, the Prime Securities index, jumped by 165 per cent this year.
"Even after taking into consideration the retreat of the real value of transactions due to the decrease in the value of the Egyptian pound, the increase in the PAMI index is [still] around 65 per cent," said Joseph Iskandar, investment analyst at Prime Securities.
Another characteristic of the year is the increase in equities transactions compared to the trading in fixed income bonds. Until the last week of 2003, the equities share of all transactions amounted to 83 per cent of the overall market turnover, almost double its level the previous year.
Analysts agree that this stems from the shares' price rally after devaluation that continued until the end of the year.
"With the pound losing around 40 per cent in the black market, the shares became very cheap compared to other investment instruments," said Iskandar.
He added that the increase in demand on shares was also due to the gains that most of the big caps realised after devaluation. "Take Oriental Weavers and Orascom Construction Industries as examples, both export the majority of their production and the dollar component of their costs is minimal. They both hit unprecedented high levels during the year," Iskandar explained.
The bond market, however, did not join this rally nor did it witness a recovery. After cornering more than half the market's transactions during 2002, it captured only 15- 17 per cent of 2003 transactions. This is attributed to bonds investors keeping their holdings after the floatation for fear of realising capital losses in case of an interest rate hike.
"In most cases , floatation of a currency is accompanied by an increase in interest rates to back up the currency, a step that undermines bond coupons and thus affects the bond price negatively," explained Khaled El-Mahdi, head of research at HSBC bank. Although there was no hike in interest rates after the floatation, a wait-and-see mood dominated the bond market.
The stock market revival was strong enough to offset the negative effects of other changes during the year. Consecutive downgrades of the country's credit rating by Standard & Poors, Moody's and Capital Intelligence failed to halt the market's weekly upward trend.
The outlook for the economy has been negative for the past three years. However, according to El-Mahdi, the market has already absorbed the effect of this. He argues that for investors who follow the Egyptian market closely and are investing in it, the downgrade will not change anything as the investors understand the market. "It will not trigger a wave of investors pulling out their money of the market," he asserts.
Another change that did not have an effect on the market was the replacement of Mahmoud Abu El-Oyoun as the governor of the Central Bank of Egypt by National Bank of Egypt's Chairman Farouk El-Okda. "Investors are now aware of the fact that it is not the person that makes a difference, it is the government policies," said Iskandar.
The listing of Vodafone stocks was a good move to end the year, but only time will tell what kind of effect they will have on the market. "The listing stirred a positive sentiment as it is the first IPO in the market in three years. Also, the listing of a new mobile operator provided the market with a competitor with which to compare MobiNil shares," said El- Mahdi.
He went on to explain that it also increased the overall market capitalisation, a factor that will attract investors who target markets with high capitalisation.
The performance of different sectors during the year varied. Pharmaceuticals and cement companies were the least fortunate as the pound devaluation added a burden to their costs. Both are mainly dependent on imported materials, which have increased in price due to the devaluation, while both have fixed and subsidised final product prices. The net result is that their profits have shrunk substantially.
The cement companies had a mixed year that started with a price war depriving most of needed revenues. They then witnessed a stabilisation in the middle of the year, after concluding price and quota agreements, and ended 2003 with a revival thanks to the post-war reconstruction contracts.
Telecoms fared very well, with Orascom Telecom being the market star. It restructured its portfolio, sold its Jordanian subsidiary Fast Link, then divested a part of its loss-making sub-Saharan subsidiary Telecel.
Clinching one of three Iraqi mobile network licenses was the deal of the year for Orascom.
Foreign transactions came as high as 22 per cent compared to only 12 per cent a year ago -- again due to the floatation. Portfolio managers found a resort in the low priced market. This came despite the fact that foreign direct investments declined throughout the year.
While observers believe that the market will maintain the upward trend through 2004, they agree that the increase will not be as steep as this year. Iskandar explained that it would have continued with the same pace if the market had risen in a gradual way, but the rise was dramatic and not based on any significant change at the macro level.
