Investors signal vote of confidence

19 November 2004
Investors on the Cairo & Alexandria Stock Exchanges (CASE) have been voting with their wallets on the performance and prospects of the new government, appointed in July. Since the start of the third quarter, the EFG and Hermes indexes have surged to end 98.4 per cent and 88.3 per cent up respectively since the start of the year. Good news for newly confident traders is that such was the low base, stocks remain comparatively good value compared with the booming valuations in the GCC and, if the momentum is maintained behind economic change, the bulls could have a long way to run.

'There are three key reasons for the bourse's performance over the past couple of months,' says a Cairo-based analyst. 'First, the acceleration of economic growth; second, the change of government and the impetus this has created behind privatisation plans; and third, bottom-up growth on the back of good three-quarter results from the blue chips.' And the movement is mainly on anticipation of the first two factors: if the reformist government delivers, there is considerable upside potential.

Banking stocks have been among the best performers on the CASE this year and the sector is among the first to have borne the fruits of reform. Cairo announced in mid-September a five-pronged strategy for consolidation and privatisation. Just a week later, Misr Exterior Bankwas merged with state-owned Banque Misr. Shares in state-owned banks have since surged on hopes that private investors will pay a premium for shares in expectation of increased profitability through management change and restructuring.

Leading telecoms blue chip Orascom Telecom (OT) has been doing well on the back of the acquisition of Bangladeshi GSM operator Sheba Telecomin September and the success of its operations in Iraq's central region. In mid-November, OT began the roll-out of its network in the south. MobiNilstock, however, has performed poorly in recent weeks on lower than expected third-quarter earnings.

Orascom Construction Industries (OCI)stock has had a surprisingly sluggish September and October, in spite of concluding the acquisition of a 51 per cent stake in Pakistan's Chakwal Cement Company. 'This could be the result of a pullback of materials stocks globally over this period,' says EFG-Hermesin its October research report. Suez Cementand Torah Cementshares on the other hand, which are geared towards the domestic market, have been rising on the back of local demand. 'One of the hallmarks of the market's performance in 2004 has been the rise in the stocks of domestically oriented companies across the sectors,' says the analyst. 'In 2003, this was not the case - it was the export-driven firms in the driving seat.'

The year's record breaker is the lesser known Ezz Steel, up by more than 230 per cent since the start of the year. The prospects look good for materials stocks as real estate development accelerates. But if the new government continues as it has begun, a resurgent economy could be the result, and shares across the board will feel the lift.

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