Investment, initial public offering (IPO), and securities promotion managers have conflicting opinions over whether the devaluation of the Egyptian pound has restored the Egyptian Exchange’s (EGX) attractiveness for foreign investors, and whether the action encourages them to inject “hot money” into the stock exchange—like what had happened before 2011 and what happened mid-2013.
The experts explained that, theoretically, the decision to devaluate the Egyptian pound should positively affect the attractiveness of the EGX, and foreign investors should be expected to inject limited investments into the exchange following the devaluation through Egypt’s economic reform programme, which the government seeks to implement in coordination with the International Monetary Fund (IMF).
It is anticipated that this outlook would continue until the economy shows improvement, specifically regarding the budget deficit, the market entry, and its exit flexibility, through providing foreign currency for investors and companies from official channels.
If the goal indicators are achieved in the reform programme, foreign investors are expected to compare between the return on the EGX and emerging competitor stock exchanges, to decide whether investments into the domestic market should increase.
Local investors have ruled out on the EGX’s ability to compete with the US dollar, real estate, and gold, even after achieving economic reforms, because they lost confidence in any other investment vehicles.
The fair price of the Egyptian pound stimulates new propositions
Mahmoud Selim, head of investment banking at HC Securities & Investment, said that the expected devaluation of the Egyptian pound will affect many sectors in the EGX. It will positively affect the evaluation of offers from the point of view of foreign and local investors, because the investor will be confident that his investment in the company is based on the fair price of the currency.
He pointed out that foreign investors, investment banks, and the companies offered in the EGX since last year agree on an offering price reduction that is equivalent to the difference between the fair value of the Egyptian pound and its official value.
Selim added that the official devaluation of the Egyptian pound and the continuation of the fair price will restore confidence for investors. During the current period, the government wants the price to be fair. Therefore, the Egyptian pound’s devaluation opportunities will be reduced on the short-term—because their investments decline by the devaluation of the Egyptian pound when they sell them or convert them into US dollars.
Selim confirmed that the currency’s devaluation put investors under the impression that share prices are cheaper than what they were before the devaluation.
He pointed out that the devaluation of the Egyptian pound is related to the shares’ attractiveness that focuses on the flexibility in determining the profit margin of each company. For example, the company that imports raw materials, such as pharmaceutical companies, are facing a decline in their attractiveness for investment due to the high costs, besides their inability to increase the prices on the consumer-level because medicine prices are determined by the Ministry of Health.
The economy’s improvement opens the door for attracting ‘hot money’
Selim said that the ability of the Egyptian pound’s devaluation to attract hot money from abroad depends on the state’s ability to benefit from the devaluation as a mean to improve economic growth and its relation to the financial reform process, which provides an indicator of the economy’s ability to decrease the budget deficit and its reliance on imports.
He emphasised that the Egyptian pound should not be over-devaluated during the economic reform process. Egypt has passed through many devaluation stages over many years. During these periods, foreign investors were cautious in investing in the EGX.
Limited purchases to foreigners at the beginning
Direct investment manager at the American Cartel Capital in the Middle East and North Africa Ayman Abu Hend believes that foreign investors will try to check the pulse of the EGX through conducting limited purchases in order to make sure that the market meets some important investment points.
The points include sufficient market liquidity that allows easy entry and exit—to give foreigners the freedom of foreign currency transfer and provide continuous shares’ purchase and sales opportunities.
Abu Hend said that the second point is related to the implementation of an economic reform programme in coordination with the stock market, which will reduce the size and number of internal shocks received by the stock market, such as debt worsening, budget deficit, and the erosion of foreign reserves.
He mentioned that the primary and quickest results of this reform programme are companies’ abilities to obtain US dollars from banks, then reselling it again to them—one of the attributes of a healthy economy. The economy will restore the ability to operate again, which will reflect on the foreign trade movement.
He said that the Egyptian pound’s devaluation and obtaining a loan from the IMF are not magic wands that will significantly recover the funds from foreign investment institutions. Egypt has obtained previous aid from Gulf countries worth more than $30bn since June 2013, but has still devaluated the Egyptian pound many times.
External dimensions will affect foreign investors’ view of the Egyptian Exchange. For example, the risk funds are now facing difficulty after investing in Greek debt, which indicates that the funds should wait before investing in countries that suffer from economic crises.
Competing with traditional investment pools is difficult
In terms of putting Egypt in a competition with the salable investments pools—US dollars, gold, and real estate—after improving economic activity, Abu Hend said that it will be difficult to make that happen at the time when economic reform begins, because it will be a high risk on the stock market to compare these pools with any other pools. Investors only trust these investment pools more than the others because they maintain their strength.
Egypt’s position amid emerging stock markets
Mohamed Fathallah, managing director of Al-Tawfik Brokerage Firm, agreed with the previous opinion and expected foreign investors to wait for the Egyptian pound’s devaluation results through an economic reform programme, and evaluating its ability to correct the economy’s path.
He added that foreign investors will compare the return on equity in the EGX to the emerging markets around the world and the Gulf markets.
He believes that the EGX’s attractiveness is not guaranteed to local investors in light of the return on deposits increase in the banks to 13%. Therefore, the stock exchange’s ability to restore the investor’s trust in achieving a high return that competes with US dollars, real estate, deposits, and gold is limited even if the economy improves in the coming year.