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Taking the brunt of a global sell-off
Those large cap stocks that pushed the market high
last month are the same ones that pulled it lower this month. During
the July 15 to August 15 period, the HFI dropped 4.4 percent to
71504.42, while the CIBC index was on the other side of the fence,
up 4.4 percent to 363.39. Needless to say, small caps – led
by over-the-counter stocks – have taken over this period.
The scene was set for stocks to rise: Egypt’s inflation rate
dropped to 8 percent in July, convincing the Central Bank of Egypt
to keep interest rates as is. Nevertheless, Egyptian equities were
seemingly hurt by the summer heat wave coming from the US, where
markets have been beleaguered by a new financial contagion. The
US sub-prime mortgage market started firing back after a five-year
boom, from 2000 to 2005, when home prices were on the rise. Mortgage
borrowers began defaulting on their loans causing a ripple effect
on those institutional investors with exposure to the sub-prime
sector, not only in the US but around the world.
How did this affect Egyptian equities? First, there are nearly a
dozen Egyptian global depository receipts (GDRs), representing the
largest listed firms in terms of market capitalization. As GDRs
trade in overseas markets, they are highly susceptible to international
market volatility. Second, non-Arab foreign investors have been
net buyers in the market for the past 14 months, but last month
as a result of profit-taking and turmoil in world market they turned
into net sellers. With foreign investors mostly favoring large-cap
stocks, those were bound to be the big losers when investors started
unwinding positions.
While gloom pervaded over foreign markets, news of stock splits
created some bright spots on the local stock exchange. Electro Cables
and EFIC saw their stocks shoot up by 229 percent and 65 percent,
respectively, on the back of stock split news. With a new chairman
at the helm of the Capital Market Authority (CMA), Electro Cables
managed to secure the authority’s approval for a stock split
rejected six months earlier. Meanwhile, EFIC – once considered
a value stock – changed personality and suddenly became a
speculative play as the stock advanced from LE 109.72 to as high
as LE 190 on August 15, again on stock split news.
Favored large caps – the likes of Mobinil, CIB and El-Sewedy
Cables – reported robust year-over-year earnings. However,
their stocks didn’t reflect that. Mobinil dropped 10 percent,
CIB closed almost flat at LE 68.99 and El-Sewedy Cables slipped
1.7 percent.
As expected, banking stocks rejoiced thanks to an unexpected offer
by National Bank of Kuwait to acquire Al-Watany Bank of Egypt (AWB)
for LE 77.01 per share, a 41-percent premium over market price and
almost five times book value. AWB ended this period up 58 percent.
However, unlike the Bank of Alexandria deal back in October 2006,
this euphoria was short-lived. Other than AWB, only National Bank
for Development seems to have benefited, closing 36.5 percent higher
at LE 21.20.
While valuation has come back to more sensible levels, it remains
to be seen whether the US contagion will be so severe that it hurts
the local market further. It would be up to local and Arab investors
to absorb such selling pressure if they decide to put on the buyers’
hats.
ANALYZE THIS
GB Auto
Consider it serendipity. Just days before the market sell-off
began, GB Auto made its debut on the stock exchange as a publicly
traded company, marking the beginning of a new era in its
59-year history. The company, which manufactures passenger
cars (mainly Hyundai), commercial vehicles and trucks, issued
a total of 33.163 million shares at LE 37 per share in an
IPO worth close to LE 1.2 billion. Both the private placement
and IPO were oversubscribed, four and seven times respectively.
GB Auto’s stock, which started trading on July 9, did
not close below the LE 40 mark throughout this period, except
for August 13, when it closed at LE 39.99. While the stock
ended the period down by 5.4 percent at LE 40.00, it was still
up 8.1 percent from its IPO price. With GB Auto’s IPO
out of the way, investors are gearing up for the next one,
a 15-percent stake in Bank of Alexandria that is expected
to be floated before year-end.
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