Egypt Assets Extend Declines After Anti-Government Protests

(Bloomberg) -- Egyptian stocks extended losses and dollar bonds fell after small but rare anti-government protests over the weekend.

The EGX 30 dropped 1.5% on Monday, extending losses to 6.7% since rallies in several cities over the weekend evoked memories of the instability that followed the 2011 uprising and ouster of former President Hosni Mubarak.

The country’s $1.75 billion of bonds due 2029 headed for the biggest decline in over a month as of 9:03 a.m. in New York, while 12-month non-deliverable forward contracts for the Egyptian pound rose the most since February, a sign that pressure on the currency may be rising.

Read more: Rare Egypt Protests Give New Resonance to Actor’s Viral Videos

Before Sunday’s slump, the equities gauge had been one of the top four performing indexes among major peers tracked by Bloomberg globally this year in dollar terms. Investors cheered reforms that spurred the economy, while the inflation rate fell to the lowest level since 2013 in August. Carry traders buying the Egyptian pound benefited from some of the highest yields in the world.

The market turmoil comes days before the central bank is scheduled to decide on monetary policy. Economists predict a 125 basis-point cut to the deposit rate.

While Goldman Sachs sees the negative impact on assets being sustained if political uncertainty rises, Naeem Brokerage suggests looking at banking stocks and the shares of the local tobacco producer.

Here’s what analysts are saying:

Goldman Sachs, Farouk Soussa

• “Should political uncertainties rise, the negative impact on Egyptian risk assets could be more sustained. In such an environment, we believe the central bank may see cause to hold rates on Thursday”
• Goldman is currently forecasting a 100 basis points rate cut this week; its “base case” is that protests are likely to fizzle out soon
• While “external and domestic bond markets may come under some pressure in the coming days,” Goldman says it’s “sanguine” over the impact of unrest on Egypt’s currency

Naeem Brokerage, Allen Sandeep

• Sunday’s slump “took the analyst community by surprise, no one looked at those protests that seriously.”
• Selling pressure was sparked initially by Arab investors, which led to margin calls to be triggered, “and then locals also had to join. So you had a whole herd of investors selling.”
• The market could be weak again Monday “because foreigners could also express their concern and sell, so we are not advising clients to take any fresh position today. But probably by tomorrow or day after, when things become clear.”
• Prefers defensive stocks, mainly banks, such as Commercial International Bank Egypt SAE and Credit Agricole Egypt SAE and domestic tobacco producer, Eastern Company SAE.

FXTM, Jameel Ahmad

• Sunday’s performance was “really strange”, since country was seen until then “as a bright spark in 2019 for the region.”
• Since Egypt stocks have outperformed regional peers this year, protests could be leading investors to take profits.

Abu Dhabi Commercial Bank, Monica Malik

• Expects the Central Bank of Egypt to lower benchmark interest rates by 100 basis points at a meeting on Thursday, following a 150 basis points cut in August.
• “The disinflation backdrop and the global monetary easing provide space for the CBE to cut.”
• Expect Egypt to continue attracting foreign capital inflows, “as its real interest rates are still high compared to the developed and EM economies.”

Century Financial, Arun Leslie John

• “Investors hate uncertainty, and they have rushed for the exit and this has resulted in EGX 30” decline, with basic resources, chemicals and real estate as the most impacted sectors.
• “Nonetheless, it should be still kept in mind that EGX 30 is one of the global outperformers‘’ for the year, and “the reason for the outperformance being strong structural reforms undertaken by the government.”

--With assistance from Paul Wallace, Yousef Gamal El-Din, Farah Elbahrawy, Netty Ismail and Paul Abelsky.

To contact the reporter on this story: Filipe Pacheco in Dubai at fpacheco4@bloomberg.net

To contact the editors responsible for this story: Celeste Perri at cperri@bloomberg.net, Paul Wallace, Dana El Baltaji

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