A July breeze

Topping the markets of the region in gains since the beginning of the year, the Egyptian stock exchange had a good month in July, Sherine Abdel-Razek reports

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July was a good month for Egyptian equities with the market's main index, the EGX30, gaining three per cent, pushing its gains since the beginning of the year to 34.2 per cent.

Year to date gains rank it at the top of its regional peers. On a monthly basis, the three per cent hike is almost double the increase in the emerging markets index calculated by Morgan Stanley.

"The post-elections retail-driven euphoria fully counterbalanced Europe breakup fears and the ensuing exit of foreign investors from emerging markets, including Egypt," noted a report by Pharos Securities on the market's performance.

Retailers and individual buyers grabbed 53.11 per cent of the transactions, 93 per cent of which was dominated by Egyptian investors. The month follows the inauguration of Egypt's first democratically elected president.

Foreigners, mainly non-Arabs, were not that optimistic. While they accounted for 6.47 per cent of market activity, they were net sellers. Indeed, selling orders exceeded purchasing activity by a difference of LE390.84 million.

According to experts, the vagueness of the political scene and unstable economic environment, together with several downgrades to Egypt's creditworthiness, are holding foreign money back from entering the market.

The first half of the month witnessed poor market performance, a trend that was reversed in the second half with transactions ending in the green for consecutive sessions.

An almost two-week drop took place following the appointment of a new prime minister, despite the fact that he has limited political experience, and the forming of a new Cabinet energised the market during the last sessions of the month.

On the listed companies level, a number of heavyweights witnessed important developments. The market regulator refrained to approve EFG-Hermes' planned joint venture with QInvest, asking the former to clarify some points in the deal. This includes whether EFG-Hermes shares will still be listed in the local market, the total value of the deal and the way it was measured and the planned use of sale proceeds.

A panel of experts issued a ruling early July stating that Talaat Mustafa Group's (TMG) Madinaty contract is invalid, a decision that gave a strong blow to its stock, which lost around eight per cent of its value.

The month also witnessed the release of company results for the second quarter of 2012/2013. According to Beltone Financial, on a regional level, Egyptian companies in different sectors are the weakest when compared both on annual and quarter-on-quarter basis, with only the financial sector and consumer goods and services reporting growth in their net incomes in the quarter compared to the previous three months.

The outlook for August is yet unclear. It started with sectarian clashes in Dahshour and a border attack that took the life of 16 Egyptians.

"Egypt is heading towards a bipolar outcome of either extreme recovery or another round of political struggle," noted Pharos.

Based on client feedback and meetings, Pharos analysts believe there is a significant pile-up of cash eyeing an optimal entry point, whether in equities and long duration fixed income or in long-term direct investment.

However, it is difficult to assess the magnitude and repercussions of challenges facing the president amid growing scepticism towards the Muslim Brotherhood. This, according to Pharos, is translated in the market by higher costs. "The actions of selected local and regional investors suggest that there is an extra risk premium required to hold equities in the short-term," Pharos noted.

Presently, calls have emerged for mass demonstrations 24 August to challenge the legitimacy of President Mohamed Mursi.