(CASE) may be entering the holiday season, but there is little sign of a let-up in the market's year-long rally. The broad-based Hermes Financial Index (HFI) closed at 42,756.52 points on 18 July, up more than 60 per cent since the beginning of the year and more than 170 per cent above its level a year ago. The second main index, the CMA, has risen by 41 per cent to 1,790.82 points since 4 January.

The strong recovery has been driven by a combination of factors, notably the general economic recovery, increased bank lending, accelerating government reform initiatives, positive company performances and cheap valuations.

'One of the main drivers has been that the government has delivered on the reform process since it came to power last August, for example by introducing the new tax law,' says Wafee Baddour, senior research analyst and strategist at the local EFG-Hermes. 'Another main driver is the continuous

process of privatisation.'

Among the government-owned companies lined up for privatisation in the next six-12 months are Bank of Alexandria, Telecom Egypt and companies in the energy sector including Alexandria Mineral Oils Company (AMOC) and Middle East Oil Refinery (Midor), both of which will be partly privatised. The government is expected to sell 20 per cent stakes in AMOC and Midor through initial public offerings (IPOs), with the AMOC transaction expected to go to market first by year-end.

Successful IPOs such as the one in Sidi Krier Petrochemicals Company (Sidpec) have been one of the key drivers behind the recent market rally. Since the completion of the secondary offering in Sidpec in the third week of June, the company's shares have been among the top five traded, with turnover reaching £E 47.4 million ($8.2 million) on 17 July. Trading volumes have been up across the board in the past 12 months, reaching weekly levels of up to £E 2,000 million ($346 million) and more in late June.

Buoyant market conditions have been underpinned by strong company results, in particular from blue chips in banking, cement, construction and telecommunications. 'Corporate earnings have been very strong across the board,' says Nashwa Saleh, executive director and head of research at the local HC Brokerage. 'And we continue to expect quite robust corporate results. Stocks are also still pretty cheap when compared with those in Saudi Arabia, for example. The PE [price/earnings] ratio of the market is in the range of nine or 10.'

With a market capitalisation of about $46,000 million, the CASE remains comparatively small when compared with markets in the Gulf, but the upside potential in the coming years is high. Much will now depend on the government maintaining its reform drive and ensuring investor confidence.