Losses bleeding still on

Uncertainty in the political scene is giving market investors a hard time. Sherine Abdel-Razek
reports on the current and future status of the market

The 25 January Revolution, like any other, had a cost and the stock exchange paid its part dearly.
Though closed for almost six weeks to absorb the shock of toppling the regime, the local bourse has
not been able to recover in the aftermath.

On Tuesday, the benchmark index EGX30 closed the day with a 2.82 per cent decline reaching
4.971 points. Total market losses are estimated at LE10 billion in what is considered to be a black
Tuesday.

On Monday, EGX30 slumped to an eight- week low, down 2.9 per cent as investors fled the market
for fear that anti- government protests may escalate in what one analyst described to Reuters by
saying: "We are sitting on top of a volcano and no one knows what the outcome of all of this will
be." The losses brought the overall market decline since the beginning of the year to 28.73 per cent.

Sessions like Monday have been repeated several times since the 25 January uprising and resulted
in stocks losing chunks of their values, foreigners opting to flee the bourse, brokerages posting their
worst ever results, and the losses bleeding is still on. Five months after the toppling of Mubarak,
ambiguity of the political scene is adding to the bourse's woes pushing analysts to downgrade many
local stocks and to recommend investors to reduce their exposure to Egypt as a whole.

A few days ago, Beltone Financial, a leading local investment bank recommended investors to
underweight Egypt. The term underweight usually refers to recommendation that leads an investor
to reduce his investment in a particular market or asset class. Beltone attributed the
recommendation to the fact that the market performance will continue to be highly correlated to the
political scene in addition to the high volatility expected close to parliamentary elections, by the end
of September 2011. The continued ambiguity surrounding the security situation and the economic
policies to be adopted, according to Beltone, has negatively affected both Egypt's fiscal and external
positions and undermines growth prospects in the medium term, by tightening the government's
fiscal space and constraining its ability to increase the much-needed capital expenditure to jump-
start the economy.

This ability is also being undermined by the pound depreciation and the consequential increase of
imported inflation and reduction in consumers' purchasing power.

A look at the market-related indicators rules out a revival soon. With the estimated price/earnings
ratio which shows that an investor has to pay LE10.63 to get LE1 of earnings, Beltone believes the
market "does not yet offer a very attractive entry point." Moreover, while the estimated dividend
yield (or how much the company pays out in dividends each year in relation to the price of its
shares) of 4.9 per cent would be considered healthy in absolute terms, "we do not find it attractive
when accounting for the effect of currency depreciation and in comparison to the yields on treasury
bills," noted Beltone.

Where the market stands now and will be standing in the short term is the result of where it was
stuck since the beginning of the year. The market's benchmark, the EGX30, lost 24 per cent of its
value in the six months ending June, which is significantly more than its regional peers, many of
whom have also been afflicted by political upheaval. According to the Commercial International
Brokerage Company (CIBC) yearbook, Tunisia -- the catalyst for the 'Arab Spring' -- has seen its
primary bourse dip by 16.4 per cent, while the GCC states of Oman, Kuwait and Bahrain are down
between 8-12 per cent since the New Year.

The effect of changes in the MENA region political scene makes the whole region look as one risky
destination which investors are abandoning. The Institute of International Finance (IIF) expects
total net private capital flows to the broader Middle East and North Africa region to decline by 27.6
per cent from 2010 to $55.7 billion in 2011, reflecting a downwards revision of $33.4 billion from
the IIF's January projection due to the impact of political turmoil on capital flows in the region.

And while things relatively stabilised with the overall EGX30 losses in the second quarter
tightening to the region of one per cent, trading volumes remained low "while the exchange's
recovery continues to be hampered by a range of macroeconomic issues -- from logistical
disruptions to strikes and corruption trials, to low tourism levels, FDI outflows and rising inflation,"
according to the CIBC yearbook.

The EGX70 index which includes smaller companies posted 12.74 per cent loss, while the EGX100
index, a sum of EGX30 and EGX70, declined by 16.58 per cent.

According to the Egyptian Stock exchange semi-annual report, all the market sectors, with the mere
exception of pharmaceuticals, lost ground with real estate and tourism being the worst hit with
declines of 41 and 37 per cent respectively.

While tourism companies suffered from a decline of 35 per cent in revenues during 2011 compared
to the first half of 2010, most of the heavyweight real estate companies were tangled in cases of
illegal purchases of land that, at the end of the day, stripped them of a portion of their land banks
after a series of court rulings. Non-Arab foreign investors who are quitting the region as a whole
were net sellers, with a net equity of LE3,161.12 million. Plagued by problems and worries, if not
in their countries, at least on their boarders, Arab investors were also net sellers during the first six
months, with a net equity of LE134.08 million.

Back to Beltone's MENA report, it suggested that investors overweight Saudi Arabia and Abu
Dhabi which were the only markets in the region to post positive quarterly growth rates in the
second quarter of 2011, with Abu Dhabi improving by 3.7 per cent and Saudi Arabia going up by
0.2 per cent. Qatar was also assigned an overweight.

While Beltone decided to stay neutral on Egyptian banks, financial institutions, construction and
building materials, it recommended investors to be overweight on consumer goods and telecom
operators. Beltone favours defensive industries, namely food and beverage (Juhayna, Eastern
Company, and National Company for Maize), telecom operators (Telecom Egypt), pharmaceuticals
(EIPICO) and export oriented/geographically diversified companies (Oriental Weavers), which
would benefit from the exposure to foreign markets and the potential depreciation in the Egyptian
pound.