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| 03 October, 2017

Egypt outperforms regional markets as IMF praises reform progress

Traders work at the Egyptian stock exchange in Cairo July 4, 2013. REUTERS/Louafi Larbi

Traders work at the Egyptian stock exchange in Cairo July 4, 2013. REUTERS/Louafi Larbi

REUTERS/Louafi Larbi

Trading volumes likely to grow in Kuwait after it was added to FTSE Russell’s emerging markets index.

 Egypt’s equities market outperformed the region in September in what was a slow month for most markets in the Middle East.

Cairo’s main index increased in value by 3.52 percent during September, as promising comments from Egypt’s new stock exchange chief and a fall in inflation boosted investor sentiment.

Egypt's new stock exchange chief, Mohamed Farid, told Reuters during the month that he planned to launch a number of reforms to increase trading volumes over the next six months, with the listing of big companies cited as a priority.

The decline in inflation also meant that the Central Bank of Egypt also decided on September 28 to keep interest rates unchanged, as most investors had expected.

“The interest rate was already high for the past 2 to 3 months. It is time to tame the high inflation levels in Egypt and to provide more support to the Egyptian pound,” a market specialist told Zawya in a telephone interview on the condition of anonymity. 

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“Even after the central bank of Egypt decided to maintain the key policy rate as is, [on] the following day we saw big hikes in petrol prices, gas prices and pre-paid mobile cards,” he added, attributing these increases to the austerity measures that have taken place in the country, with subsidies being squeezed.

The IMF was also in Egypt towards the end of September to assess its economic reform programme. Its updated Country Focus on Egypt provided a positive view on the outlook for the economy, which gave an additional boost to the market.

The Saudi market gained 0.34 percent during the month of September, while Kuwait’s main index lost 3.08 percent.

In a report posted on its website on Friday, Sept. 29, FTSE Russell announced results of the FTSE annual country classification review for its emerging markets index, which is used by many fund managers to deploy capital.

Kuwait was added to FTSE Russell’s emerging markets index, where it was classed as a secondary market, but hopes for Saudi Arabia’s inclusion were placed on hold.

FTSE Russell said Saudi Arabia is close to an upgrade and that it is likely to soon meet promotion criteria. It said Saudi Arabia would next be assessed for inclusion in March 2018.

Analysts had predicted that a FTSE upgrade would have led to passive fund inflows of around $3.2 billion to $3.7 billion to Saudi Arabia.

“The delay to the upgrade was leaked in the market a week [earlier] and the market in Saudi started to trade lower, with some profit -taking and minor corrections on the fear that Saudi might get [its] FTSE upgrade delayed,” the market specialist told Zawya.

On Monday September 25’s trading session, the Saudi market dropped 1.39 percent.

Marie Salem, director of capital markets at FFA Dubai said: “Saudi Arabia was denied entry to FTSE’s emerging markets list, leaving the pressure on its neighbour Kuwait, where expected inflow resulting from the inclusion ranges between $600 million-$800 million.”

She added: “Despite the denial of entry, we still expect to see more appetite towards Saudi which, with the amendment of driving laws and upcoming listings, will attract investors, hoping and aiming for next year’s FTSE’s review.”

More foreign investors

Salem said that despite the recent decline in the Kuwait Stock Exchange Index, Kuwait “has been the [best] performing market for the year, and with the FTSE inclusion volumes are expected to rise”.

She said that most of the increase in trading will be as a result of the entry of foreign investors and institutions into the market.

“Banks and real estate companies are expected to attract most of the flow as they have been doing quite well, among other sectors.”

Elsewhere in the Gulf, the market in Abu Dhabi fell 1.59 percent in September. Neighbouring Dubai dropped 2.02 percent, with trading volumes remaining fairly weak.

Despite this, the outlook for the coming months remains bright, with a Reuters poll of 13 regional fund managers in September revealing participants are positive on the prospects for UAE markets. Some 30 percent of fund managers polled expect to increase their UAE equity allocation, citing relatively attractive valuations versus other emerging markets.

Salem said: “GCC markets tend to move in the same direction. Volumes in September have been low across the Gulf as investors were keeping cash in anticipation of better days in the near future.

“With all the latest news from Saudi, Kuwait and the UAE’s upcoming mergers and acquisitions and listings, we expect to see more volumes throughout the last quarter of 2017, triggering a beginning of a successful 2018.”

The market specialist who spoke anonymously to Zawya said that traders were also watching the potential consolidation between Kuwait Finance House (KFH) and Bahrain’s Ahli United Bank (AUB).

Although this proposed merger was already disclosed in July by Kuwait’s biggest Islamic lender, it is still supporting investor interest in the banking sector, especially in Kuwait. “If this acquisition goes forward, it will create a big lender in the region, with different exposure to different markets. It can create value to shareholders with time,” he said.

“However, KFH is an Islamic bank while AUB is conventional bank, so there is some scepticism among traders on how easily they can consolidate the Shariah and conventional banks together; they might need to change the corporate bylaws of the bank or get shareholders’ board approval,” the specialist added.

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© Zawya 2017