Egypt index soars in massive volume after currency devalued; Gulf markets weak

Cairo's main stock index soared 6.7 percent on Monday, its biggest jump since Islamist president Mohamed Morsi was toppled in July 2013, after the central bank devalued the currency, raising hopes that Egypt's foreign exchange shortage might finally be resolved. The central bank said it had devalued the Egyptian pound to 8.85 per US dollar at a special foreign exchange auction. It had previously set the average bid price at its regular and exceptional auctions at 7.73.
The Cairo index rocketed to 7,004 points, near technical resistance on this year's peak of 7,114 points, in the heaviest trade since at least 2009. It had already risen 7.8 percent last week on signs authorities were moving to ease a foreign exchange shortage that has plagued the economy for years. "Markets are rallying quickly to reprice Egyptian assets after the devaluation," said Simon Kitchen, head of regional strategy at Cairo's EFG Hermes.
A lower Egyptian pound, and a sense that the currency is no longer overvalued, could attract fresh capital flows into the country from Egyptians abroad as well as foreign investors. For years, the risk of a devaluation deterred foreigners from putting money into Egypt. "When the rate differential between the spot foreign exchange market and the black market narrows, this entices foreign buyers to return to the stock market," said Ashraf el-Ansary, chief investment officer at London-based Exante Capital. There are still plenty of risks for the stock market, so some traders said it might soon fall back. Many analysts think the central bank will hike interest rates to fight inflation fuelled by the devaluation.
But the devaluation may not be over; J.P. Morgan predicted that after Monday's 13 percent devaluation, the central bank would gradually weaken the currency further, bringing the total drop to 35 percent by the end of 2016. Investors focused on Monday on the positives. One big gainer was Commercial International Bank, the largest listed bank, which surged 7.1 percent; J.P. Morgan said the bank's management had previously indicated that a devaluation would have a net positive impact on its bottom line, with a neutral impact on its foreign exchange asset-liability balance.
Real estate developer Talaat Mostafa surged 9.8 percent; a cheaper currency could lure some regional investors to buy real estate, and Egyptians to put money into the sector as a store of value. Exporters and tourism companies may also benefit from the devaluation if Egypt can reassure foreign tourists on the issue of security. Arabia Cotton Ginning, which exports textiles and other products, jumped 5.2 percent and Egyptian Resorts added 6.9 percent.
Brokerage Pioneers Holding soared 10 percent after reporting a 73 percent jump in net profit for 2015. J.P. Morgan said it expected Egypt to agree with the International Monetary Fund on a loan programme before the end of the fiscal year in June. This would be a politically difficult step for the government; for this reason, Egypt has not committed itself to an IMF programme in the last several years. But the devaluation may have satisfied a key policy condition demanded by the IMF, and an IMF loan would be welcomed by foreign investors.
In the Gulf, Riyadh's index fell 1.3 percent as Brent dropped back below $40 a barrel, prompting a sell-off in the petrochemical sector. The sector's sub-index dropped 2.7 percent.
The insurance sector, favoured by local individual speculators, was also hit, with many shares falling more than 3 percent. Dubai's index dropped 1.5 percent as traders booked profits, with Dubai Parks losing 5.6 percent, erasing some of its 14.3 percent gain on Sunday. Arabtec fell 2.9 percent and Emaar Properties dropped 1.4 percent.
But Abu Dhabi's largest listed stock by market value, Etisalat, jumped 3.1 percent in the heaviest trade since November, helping lift the index 0.8 percent. Etisalat had been falling sharply since Thursday, when it said chief executive Ahmad Julfar had resigned and that it would restructure by the end of June. International index compiler FTSE Russell has said it will add Etisalat to its All-World and other indexes after the close of business on March 18, so investors may now be positioning for that. Doha's index slid 0.1 percent as Gulf International Services, the oil drilling rig provider, fell 1.6 percent.