In terms of economic performance, Ahmed Nazif has led a charmed life since he took over from Atef Obeid as Prime Minister of Egypt in July 2004. Nazif's administration has introduced a foreign exchange system for the banking sector, liberalised telecoms, simplified customs, and changed the law so that foreigners can own companies.

After almost four years of reforms, Egypt was rewarded with record foreign direct investment of more than $11bn in the financial year to the end of June 2007.

Something similar appears to have happened on the Cairo & Alexandria Stock Exchanges (Case). The Case 30 index of the largest companies in Egypt stood at 1,536 points on 14 July 2004. By the time Nazif's reformists had taken over, the index was already 53.6 per cent higher than at its debut on 1 January 1998.

Since July 2004, however, the Case 30 has trounced its previous performance. The index reached 11,740 points on 24 April this year, seven times its level when Nazif came into power, and more than 11 times higher than its level at the start of 1998.

This performance - with only a few dips along the way - makes the Egyptian stock market one of the fastest growing in the world.

The government ministers, civil servants and experienced managers who took over the top jobs in 2004 were able to introduce several quick reforms that brought major benefits to the country's capital market. The Central Bank of Egypt, which has become more independent under Nazif's premiership, has over the past four years introduced Egypt's first official foreign exchange system. It replaces an informal system of exchanging currency that caused problems for foreign investors looking to withdraw their profits from Egypt.

Taking control

"All foreign exchange was done outside the banking system so the price of exchange was uncertain," says Tarek Amer, deputy governor of the central bank. "We did not, as a regulator or as a banking system, have any control over the exchange rate."

As for the Case, it began imposing corporate governance rules on listed companies in 2006. Companies were obliged to appoint non-executive directors to a majority of board seats and accounts had to be signed off by an independent auditor.

The stock market threatened to remove any companies that failed to follow the rules from the Case 30 index. The result was that investors began to see Egypt as an emerging market where the rules were followed.

But why has Egypt outperformed the other Arab markets? The government's attitude towards foreign investors is almost certainly the decisive factor.

Foreign investors can hold stocks in any listed firm and if they hold a large enough stake, they can take control of the company. France Telecom demonstrated that the new rules worked when it bought a 36.3 per cent stake in Mobinil, Egypt's largest mobile phone operator. Its stake made it a bigger shareholder in Mobinil than Orascom Telecom, the telecoms company that founded Mobinil in 1998.

By contrast, other Arab countries that have grown quickly in recent years have prevented foreign investors from building stakes in any of their companies. Only Saudi nationals can invest directly in the Tadawul and its main index, the Tadawul All-Share index (Tasi).

The authorities in Dubai have created different stock exchanges for foreigners and nationals. Most big Dubai companies are listed on the nationals-only Dubai Financial Market (DFM), while the foreigner-friendly Dubai International Financial Exchange (DIFX) had only one listed company - from Saudi Arabia - until the initial public offering by Dubai Ports World in November 2007.

Potential pitfalls

The Case 30 index has followed an upward trajectory almost without exception over the past four years, while many markets in the GCC have crashed before recovering again.

However, there are some clear threats to the performance of Egyptian equities, such as political or economic uncertainty, although they have not had a negative impact on investor sentiment so far.

"If there were signs of political or econ- omic uncertainty, people would move away from emerging markets such as Egypt," says Deborah Fuhr, managing director of investment strategies at US investment bank Morgan Stanley.

Egypt has experienced political uncertainty already this year, but so far it has not affected confidence in the bourse. In late March, violence in queues for subsidised bread led to the deaths of up to 15 people.

President Hosni Mubarak responded by ordering the military to bake bread for civilian consumption. Better availability of bread and heavier policing of public protests have prevented further outbreaks of violence.

The greatest threat to Egypt's political stability in the short term is a return to rioting in bread queues. Further problems in supplying cheap bread to government-backed bakeries will inevitably mean a return to seven-hour queues in temperatures ranging between 30°c and 40°c.

International investment bank Barclays Capital expects the price of wheat to fall from its record highs in the first three months of 2008. It predicts the price will drop from an average of $10.25 a bushel in the first quarter of this year to a stable $7.50 in the fourth.

"Egypt is doubling its bread subsidies for the coming fiscal year," says Matt Vogel, head of Europe, Middle East and Asia research at Barclays Capital. "Even though the price of wheat is going down, the wheat subsidy is still a larger burden on the budget than it was two years ago."

Investor interest

Two initial public offerings (IPOs) on the Case prove that investors are so far unconcerned by both political instability and the impact of food subsidies on the public finances. "They are both compelling stories," says one Egyptian broker.

The first, Maridive, an oil services company specialising in offshore work, became the second most popular IPO in the Case's history when its broker, EFG-Hermes, Egypt's largest investment bank, stopped taking subscriptions on 24 April.

Prospective shareholders amassed $8.4bn for Maridive shares, 31 times the capital the company was seeking.

The second, real estate company Palm Hills Development, is seeking $350m for its IPO, which will take place in May. EFG-Hermes and US investment bank Goldman Sachs are overseeing the share subscription.

The only IPO to attract more excitement than Maridive was Telecom Egypt, the fixed-line telecoms monopolist, when it floated in December 2005. Prospective investors put forward 40 times the $891m in capital the company sought.

The high-profile IPOs have given a short-term boost to the Egyptian stock market, but the strong performance of the Case 30 is primarily driven by the financial results of its constituent companies.

Most of the big Egyptian stocks have done well thanks to their exposure to the quickly growing domestic economy. Egypt's gross domestic product (GDP) grew by 6.8 per cent in 2006 and 7 per cent in 2007, according to Fitch Ratings. The ratings agency forecasts the economy will grow by 6.8 per cent in 2008.

Egypt's economy, which performed badly for at least two decades prior to Nazif coming to power, appears to be avoiding the economic slowdown that originated in the US last year. The country's biggest companies expect to repeat the successes they enjoyed in 2007 this year. The financial community in Cairo agrees. "The first-quarter results are expected to be high," says Ahmed Bifrway, data analyst at EFG-Hermes.

Apart from political risk, the Case 30 index does have some downsides for potential investors. Four of the largest companies on the index belong to the Orascom group, and ultimately the Sawiris family. Orascom Telecom, Orascom Construction, Orascom Hotels and Mobinil are all ultimately controlled by Onsi Sawiris' three sons - Naguib, Nassef and Samih - even if large, independent shareholders, such as France Telecom, can influence boardroom decisions.

The influence of one family over 47 per cent of the index by market capitalisation should worry investors. Conflicts of interest and excessive concentration of power - by any international comparisons - could lead to decisions being taken that fail to benefit smaller shareholders.

At the same time, the stock market regulators' attempts to enforce corporate governance in Egypt are welcome. The Egyptian Institute of Directors, a think-tank backed by the Investment Ministry, wrote the Guide to Corporate Governance Principles in Egypt in partnership with senior managers of the stock market back in 2006. Two years later, the Case is changing its listing requirements in a second clampdown on rogue corporate behaviour.

Companies will soon have to explain any failure to comply with the guide in their annual reports. As the guide calls on companies to split the roles of chairman and chief executive officer (CEO), many of Egypt's largest companies will have to justify their boardroom arrangements in public for the first time.

Litmus test

Naguib Sawiris is both chairman and CEO of Orascom Telecom. Samih Sawiris is both chairman and CEO of Orascom Hotels. Nassef Sawiris is CEO of Orascom Construction and the patriarch and founder of the family business, Onsi Sawiris, is chairman. As these three companies are so important, they will be the ultimate test of the authorities' ability to toughen up the regulations.

But the regulator is determined. "If any of these companies were not complying with our rules and regulations, they would be delisted," says Mohamed Omran, vice-chairman of the Case.

The concentration of power in the hands of the Sawiris family is one risk to the continued growth of the Case 30. Another is the reliance on a small number of industries. Telecoms, construction, tourism and finance dominate the index.

The Egyptian government has shown willingness to develop other sectors. It has created a business park for IT companies on the outskirts of Giza. Work will begin on a second park in eastern Cairo later this year.

But until the economy has diversified, the Case 30 will remain dominated by the same stocks and sectors.

Egypt Case 30 Index - top 5 firms by market cap

1. Orascom Construction Industries - $16.7bn

2. Orascom Telecom - $16.5bn

3. EFG-Hermes - $4.1bn

4. Commercial International Bank - $3.3bn

5. Egyptian Kuwait Holding - $2.9bn

Source: Cairo & Alexandria Stock Exchanges

Table: Case 30 companies - weight of stock in the index