Cairo's summertime blues

By BBC News Online's Bob Trevelyan

Emerging market turmoil enveloping Turkey and Argentina is also claiming some less high-profile victims.

Egypt's stock market, once the apple of the intrepid Middle East investor's eye, has slumped to levels not seen for more than seven years.

While foreign investment has retreated to less risky markets in the face of global economic slowdown, local investors are hoping that the depressed air in Cairo will lift when they return to work after summer holidays.

Foreign investors have deserted the Cairo Stock Exchange

But a combination of local, regional and international factors is making the case for a rebound increasingly hard to make.

Milestone

Five years ago, it all looked rather different.

After several years of slow progress with a privatisation programme that promised the sell-off of 314 state-owned companies, the Egyptian government finally gave investors what they wanted - a majority stake in a company heading for the stock market.

Egyptian stock market, 2000

Turnover: 54bn Egyptian pounds

Market capitalisation: 120bn Egyptian pounds (35% of GDP)

Number of listed companies: 1,076

Number of traded companies: 659

Number of actively traded companies: About 100

Source: Capital Markets Authority
$1=3.9 Egyptian pounds

The sale of shares in Nasr City Housing - an unglamorous company, you might think - proved to be a milestone.

Investor interest took off, other initial public offerings followed and the market ended the year 43% higher than it had begun it.

The number of Cairo brokerages climbed into the hundreds and international banks such as HSBC, ABN Amro and Flemings stepped up their presence in one of the region's few markets with a realistic claim on foreign investor attention.

Shortly after, in February 1997, the benchmark Hermes index cleared 16,500 to reach what remains an all-time high.

Telecoms frenzy

But since then, performance has mostly disappointed, with only a few spurts of excitement along the way.

The flow of initial public offerings dried up and investors grew disillusioned with a government that promised much but delivered little.

The bright spots came largely from the greater numbers of private companies making their way to the market.

Mobile phone operator MobiNil in early 1999 became the first telecoms firm to list, immediately generating a frenzy of activity.

In months, the company's shares had more than quadrupled in value, giving an impressive boost to overall market value and turnover.

But the effect was to disguise stagnation in the wider market.

Despite this, the market ended the year on a positive note, following the appointment of Atef Obeid, former privatisation minister, at the head of a new government.

Misplaced

Several analysts confidently identified Egypt as an emerging market star for 2000, awaiting the huge planned flotation of state phone firm Telecom Egypt.

The optimism soon proved misplaced.

MobiNil, which accounted for about 35% of the bourse's value, plunged taking the rest of the market with it as US companies led a worldwide bursting of the tech and telecoms bubble.

There is no interest in the stock market and disappointment in economic policies

Eissa Fathy Eissa, National Securities

Some analysts drew grim comfort from the fact the market was now reacting to external developments - a sign of increasing sophistication.

But 2000 also saw the Telecom Egypt flotation pulled, the fleeing of foreign investors and a slump in trading volumes and share prices.

The EFG index, which tracks only the 22 largest, most actively traded stocks and is therefore the best gauge of foreign investor activity, went into a particularly sharp decline.

Bond issue effect

Besides worries over global economic slowdown and stock market turmoil, 2001 has been characterised by growing investor disgruntlement with the government as well as unease about worsening relations between Israel and the Palestinians.

Moves that might otherwise have lifted the market - a successful sovereign bond issue, a modest fall in the value of the Egyptian pound and the inclusion of Egypt in a key emerging markets index - have not done so.

The market cannot fall more than this

Ashraf Abdel-Aziz, CIBC

"We expected a positive effect on the stock market but it didn't happen," says Eissa Fathy Eissa, general manager of National Securities brokerage.

After the bond issue, the Egyptian pound actually strengthened against the dollar.

And no new foreign investment came.

Incentives needed

"There is no interest in the stock market and disappointment in [the government's] economic policies," Mr Eissa says.

"The fall in confidence is steep."

Like many others, Mr Eissa says the Egyptian pound is still overvalued while high interest rates are unhelpful.

He also wants the government to take the lead in establishing market-maker companies to help bring stability to the stock market.

"We need incentives, at least to keep local investors in the market."

Vodafone sale?

But there is little sign of that or any juicy morsels from the government - most of the attractive state companies have already been sold off while the long-awaited Telecom Egypt flotation has been put on ice pending market revival.

The mooted sale of shares in Click GSM - a local mobile phone operator part-owned by Vodafone - also looks little likely to proceed given current market conditions, raising the prospect of the Cairo bourse going through an entire year without any significant initial public offerings.

In the meantime, corporate earnings - most recently from Orascom Telecom, the market's second telecoms heavyweight - continue to disappoint.

'No panic'

Despite the gloom, many analysts say the market is now undervalued and has little further to fall.

"After what happened [recently] and the prices we saw, the market cannot fall more than this," says Ashraf Abdel-Aziz, senior trader at CIBC brokerage.

Both he and Mr Eissa say the most actively traded stocks are now "very attractive" and the market should recover with increased turnover after the holiday period.

"In one or two months the market will go up," says Mr Abdel-Aziz. "There is no panic."