The Egyptian stock market has stabilised after a dramatic 9.6 per cent fall on 25 November sparked by a fresh wave of demonstrations.

Widespread protests erupted throughout the country again after President Mohamed Morsi gave himself new powers and made his decisions immune from legal challenges on 22 November.

Benchmark index EGX30 recovered by 2.6 per cent on 26 November, but was flat the next day as tension remained high in the country and demonstrators occupied Tahrir Square, the hub of the protest movement that overthrew former dictator Hosni Mubarak, for a fifth day.

Although the Egyptian Exchange is one of the largest and most liquid in the Middle East, with substantial foreign participation, it was local investors that drove the sell-off, says Mohamed Radwan, head of equities at local broker Pharos.

“Maybe sentiment among local investors has improved a little, but the issues surrounding the presidential decree have not been solved,” adds Radwan. “So investors will remain very cautious in the short term, which can be seen in the trading volumes, which were at one of the lowest levels of the year yesterday [27 November].” Just over $37bn of shares were traded on 27 November.

Although Morsi has attempted to placate Egyptians opposed to his power grab, tensions remain high in the country and have exposed the deep divide between the president’s Islamist supporters and the secular and liberal opposition. That division threatens to delay attempts to secure a $4.8bn IMF loan, which if approved would unlock a further $10bn in foreign aid. The Egyptian Exchange received a boost when the Washington-based IMF reached a preliminary agreement with Cairo, and traders say if a deal is finalised, it should provide another bump up.

The current round of selling has further taken the steam out of a significant bull run on the market, which started to drop in September. “By the end of September, Egypt was one of the best performing markets in the world,” says Radwan. Even after dropping about 20 per cent since peaking in September, international fund managers who bought into Egypt at the start of the year could still have gains of about 37 per cent.

Last year, the exchange suffered steep declines amid a prolonged period of political turmoil and a weakening economy. Since the start of 2012, the exchange has been on an upward trend. That is expected to encourage more international fund managers to allocate some of their investments into Egypt once the new year starts, especially if they missed out on the gains of 2012.

“Nobody wants to come into the market now as the gains of this year have been had, but the recent drop could provide the opportunity for foreign investment to come in at the start of next year,” says one trader in Cairo.