The EGX Rollercoaster: Understanding the Egyptian Stock Market’s Volatility

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The EGX Rollercoaster: Understanding the Egyptian Stock Market’s Volatility

The Egyptian stock market has been on a rollercoaster over the last couple of years. From a significant rise beginning in 2022 through early March 2024, to a sharp decline afterwards, despite the positive economic news. This has left many people, especially small investors, bewildered. Shouldn’t the stock market reflect the real economy’s state?

Despite the trauma for traders and investors, the stock market’s rollercoaster trend is comprehensible. The upward trend in 2022 and 2023 was primarily driven by the pressures on the Egyptian pound and the escalating dollar exchange rate in the parallel market. The environment pushed many investors to seek alternative stores of value, such as dollars, gold, real estate and the stock market aiming to preserve their savings’ value. They believed that such assets would reprice as the pound devalued. This assumption wasn’t wrong as such assets repriced after previous devaluations, including stocks which repriced in a span of a year after the 2016 devaluation.

Though the strategy wasn’t wrong, this time there were differences. In the last couple of years, especially by late 2023 and early 2024, the gap between the parallel market and the official market widened significantly, with the dollar trading in the parallel market at more than double its official rate. Expectations of a higher exchange rate in the near term, way above the already high rate in the parallel market, further fueled the stock market as investors rushed into the market bidding up prices of stocks, especially those with dollar-based revenues, which has pushed the index upward from 10,000 points in early 2022 to 33,000 points in early 2024.

Then, out of the blue, the Ras El-Hekma deal was announced in early March 2024, followed by an agreement with the IMF. These events paved the way for the devaluation of the Egyptian Pound, moving the dollar exchange rate from 31 pounds to around 47 pounds now. This was also coupled with a big hike in interest rates. The stock market’s sharp decline afterwards ensued as investors realized that their expectations about the future value of the pound were unrealistic, with the actual exchange rate around 30% less than the parallel market rate pre-devaluation.

The journey to the bottom of the Egyptian stock market has been quite tough and on a deeper look, there are a few reasons behind it.
1. Stock Repricing: Repricing of the stocks in the market based on the new exchange rate post devaluation as compared to the extremely high exchange rate the investors were using to price stocks, especially dollar-based stocks.
2. Reduced Need for Hedging: After the devaluation and the disappearance of the parallel market, the need to hedge against devaluation disappeared and thus many of the investors that entered the market in the last couple of years saw no further need for hedging.
3. Margin Calls: As the market correction started taking place, many of the investors who bought on margin (borrowed money to buy stocks) started to get margin calls pushing them to sell their holdings to cover their position, thus pushing prices even further downward.
4. Interest Rate Hike: The interest rate hike had a clear negative effect on the balance sheet and profitability of many listed companies, especially those heavily in debt. Plus, the hike has made buying on margin extremely expensive and thus decreased the buying power of investors.
5. Capital Gains Tax Rumors: During the last couple of months, there were rumors about capital gains taxes application on the stock market. And though the final decision was to delay the application of such taxes, the rumors have caused further turbulence in the market.
6. Institutional Investor Exit: With the foreseen correction, many institutional investors got out of the market, to return and buy the stocks cheaply when the market reached the bottom.
7. Small Investor Panic: Finally, the selloff in the market and sharp decline have freighted the small investors pushing them to dump their stocks, thus pushing the market further downward.

The bottom line, the correction in the stock market has been very steep. As a result, the market lost one-third of its market value in a couple of months, before beginning a slight recovery lately on the back of some positive news. Whether the market has reached its nadir or still faces further correction remains unclear. The market still has more correction to bear before recovery commences. Investors are watching closely to see if an upward trend resumes or if more challenges lie ahead.

Omar El-Shenety,
Managing partner at Zilla Capital and adjunct faculty at AUC School of Business

    Knowledge Partners


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