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IS THE PARTY OVER?
The period from January 15 to February 15 was volatile, with the HFI and CIBC indices falling 7.0 percent and 2.2 percent to 90673.52 and 437.55, respectively. The party that started with the New Year came to a halt, at least for large caps, as indicated by the HFI underperformance – down 2.2 percent year-to-date. Small caps, on the other hand, have held on to most of their earlier gains. Indeed, the CIBC index was still up 8.5 percent for the year.
On the macro level, inflation has resumed its upward trend into double digits as the Consumer Price Index (CPI) for urban areas registered 10.5 percent in January 2008. In response, the Central Bank of Egypt (CBE) raised overnight deposit and lending rates by a symbolic 25 basis points to 9 percent and 11 percent, respectively – a move unanticipated by many market participants. Indeed, the market was expecting the CBE to continue its 14-month-long no-action. But the higher inflation has put the CBE between a rock and a hard place. The more hawkish it becomes, the wider the interest rate differential will be between the Egyptian pound and the US dollar, which could lead to a revaluation of the pound – a move that could hurt Egyptian exporters. And if interest rates go up too high, the CBE risks stifling overall economic growth.
On the equities side, small caps led the pack with a couple of stocks ringing up triple-digit returns, namely Misr Duty Free Shops (MDFS) and Ceramics & Porcelain (C&P), up 146 percent and 107 percent to LE 226.32 and LE 156.27, respectively. MDFS’s board of directors had approved a 10-for-1 stock split, a capital increase through a secondary issue, and a stock dividend. The company later reported 20-percent higher profits in the six months ended December 2007. Meanwhile, C&P did not make the headlines during the period, leaving investors wondering what the story is. Next ranked was Egyptian Chemical Industries (KIMA), which rose 77 percent to LE 155.32. After a fire at its factory on February 2 caused LE 1.5 million worth of damage, the company revealed plans to establish a LE 3 billion industrial compound for fertilizers by 2010, including urea and possibly phosphate fertilizer plants. Fertilizer stocks have been in favor recently thanks to rising fertilizer prices and potential interest by local investors. EFIC, a phosphate fertilizer producer, stood out from other fertilizer-related stocks as it closed the period on a positive note, up 4.2 percent at LE 187.87.
In terms of corporate news, it seems that Egyptian companies are following their Gulf counterparts by heading west. Two Egyptian companies in two different industries – El Sewedy Cables and ASEC Holding – plan to invest in Algeria. The latter will also invest in a cement plant in Libya.
Several large-cap stocks, including Orascom Telecom, EFG-Hermes, Ezz Steel, Telecom Egypt, Credit Agricole Indosuez (Egypt) and NSGB, have closed in the red. Yet, non-Arab foreign investors were net buyers during the period as they have been for the last two years. Also, institutional investors have been net buyers, suggesting an accumulation by foreign institutions as they pick up large-cap stocks at cheaper valuations. The market has fallen off its January peak in what investors see as a sharp correction. Some investors believe this could be healthy for the market. After all, the market cannot continue to go up forever.
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Egypt Kuwait Holding Company
Egypt Kuwait Holding Co. (EKH) ended the period up 14 percent to $3.01. The US-dollar denominated stock benefited off the overall market buoying fertilizer-related stocks. EKH has interests in both the fertilizer and energy sectors through subsidiaries, such as Alexandria Fertilizers and other energy companies. With fertilizers stocks already stretching to higher valuations, investors have appreciated EKH as an indirect play on that sector. More recently, EKH's stock was buoyed by the announcement of a petroleum discovery by one of its subsidiaries, Tri-Ocean Energy, in the Gulf of Suez region in cooperation with BP Egypt with an expected capacity of 10,000 barrels per day. Both partners equally share that concession’s rights. EKH also invests in Egypt's burgeoning insurance industry. It has applied to the Egyptian Insurance Supervisory Authority asking for approval to establish two co-operative insurance companies.
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