April 3, 2014
Is the turbulence intentional?
The Egyptian stock market (EGX) witnessed turbulent two trading sessions post the long awaited Al-Sisi’s announcement of his intention to run for presidential elections. During these two trading sessions the main index, EGX30, declined by 2.70% and 3.55% on March 27th, 2014 and March 31st, 2014, respectively.
There were several theories driven by conspiracy basingÂ the above-mentioned market decline on intentional selling behaviorÂ by Egyptian institutional investors as a sort of manipulation to repurchase the sold stocks at cheaper prices. This behavior is called “Trash and Cash”. Others went further and assumed that this was an intentional behavior by pro-Muslim brotherhood investors to indicate that the announcement of Al-Sisi is not welcomed by investors.
The real reasons
However, considering the development of sÂtocks prices, Dcode EFC has a different view. EGX30 index, which measures the price performance of large-actively traded stocks, and EGX70 index, which measures the price performance of small-less actively traded stocks, increased by 81.02% and 83.24%, respectively, between June 28th, 2013 and March 26th, 2014. Such significant and steep increase was only driven by investors’ positive sentiment towards the implementation of the political roadmap rather than any solid and concrete economic improvement apart from the aid received from the different Gulf States post the ousting of President
Mohamed Morsi in July 2013.
In other words, seasoned investors were already taking in consideration (discounting) Al-Sisi’s possibility to run for presidential elections (political event) and this might have led the aforementioned steep price increases. However, investors would want to materialize this profit at a certain point of time. This point of time is usually when the fact is announced (Al-Sisi announcing that he is running for presidency). This behavior is named “buy the rumor, sell the news”Â.
The layman investor would have started investing in the stock market at the end of the upward trend witnessed since June 2013 assuming that when Al-Sisi announces his intentions, the market will increase immediately by 2% to 5%. These investors led EGX30 to increase by 1% at the opening of the session post Al-Sisi announcement. Seasoned investors, on the other hand, were waiting for this piece of news to sell heavily and take profits.
During the first trading session, Egyptians dominated the selling behavior being net sellers with EGP 97.2 mn while foreigners were net buyers at the end of the same day being net buyers by EGP 63.8 mn. However, during the second trading session, Foreigners were significant net sellers with a magnitude of EGP 568.7 mn. This selling behavior was mainly due to the private equity firm Actis selling 2.6% (of its 9.1% stake) in the Commercial International Bank (CIB) to predetermined Arab investors rather than being a general foreigners’ behavior.
To summarize, Dcode EFC assessed that this price correction is a healthy sign to the Egyptian market given the steep price increases witnessed in the last 9 months. Without this correction, the market would have reached to levels whereby the correction would have been much stronger. Going forward, Dcode EFC projects that stock prices will continue their correction and EGX30 index will potentially reach the level of 7,700 point. Afterwards, a gradual and cautious price increase would occur to potentially reach the level of 10,000 points. It is worthy of mention that, with the political roadmap gaining momentum, investors will start to focus on economic indicators and company fundamentals rather than the political situation. This raises the importance for any incumbent president to focus on reforming the economic imbalances witnessed in Egypt in a swift manner.