Is EGX Poised to Rebound in May After April’s Losses?

Some hope that Egypt’s Stock Exchange (EGX) will regain in May the heavy losses incurred in April in response to the geopolitical tensions in the region along with other local developments.

The EGX lost over 7.5 percent of its market cap in April, declining to EGP 1.7 trillion from EGP 1.8 trillion.

Foreigners recorded a net sell-off totalling EGP 373.1 million, while Arabs registered a net sell-off of EGP 459.5 million, excluding transactions.

Yet, the EGX has started to recoup its losses in the first two sessions in May, with the market cap increasing by EGP 95 billion.

The stock exchange will resume operations, following holidays to celebrate Labour Day and Easter.

Mohamed Sharawy, a stock market expert at Pioneers Securities, told Ahram Online that the stock exchange is the lifeblood of the Egyptian economy as it is the primary gateway for direct and indirect investment.

Reasons for April losses Sharawy attributed the decline, which persisted for about 45 sessions, to the geopolitical tensions in the region caused by the Israeli war on Gaza that contributed to a significant exodus of foreign investors from the local market.

“This was subsequently followed by local investors withdrawing from the market, selling off a portion of their stock holdings to cover margin purchases,” he added.

According to Sharawy, the EGX allows investors to secure a loan for purchasing extra shares using their original portfolio as collateral.

He added that when the market experiences a decline, it prompts a reassessment of the initial portfolio, compelling the investor to sell the shares bought with the loan to restore the original value following the price decrease.

Sharawy highlighted another factor behind the under-performing EGX during April.

“The second and primary factor contributing to the recent sharp decline of the stock market is the news published nearly two weeks ago regarding the imminent implementation of a capital gains tax.

This announcement has disrupted the market and resulted in significant losses,” he said.

He mentioned that the cabinet's announcement to initiate the collection of the capital gains tax, starting from the March/April 2025 tax season, has reinstated equilibrium in the market before the onset of the May sessions.

Capital gains tax is a tax on the profit of sold or disposed shares and stakes floated on the stock market.

The announcement came while Egypt is working to boost its tax revenues to raise the primary budget surplus to over 3.5 percent in the upcoming FY2024/2025, which starts on 1 July, up from an estimated 2.5 in the current fiscal year.

Sharawy anticipated an uptick in certain sectors of the stock market in the short term, spurred by improved clarity for investors, particularly regarding the implementation of the capital gains tax.

How could the IPO be affected? Sharawy urged the government to improve stock market mechanisms and take into account the success factors of the government’s initial public offering (IPO) programme.

These factors include the timing to ensure the stock market's readiness for the offering process, external promotion, and setting reasonable pricing without overvaluation to maximize benefits.

In line with its State-Ownership Policy, Egypt has adopted a comprehensive privatization programme to increase the private sector’s participation in the Egyptian economy.

This aligns with the country’s commitments to the International Monetary Fund (IMF) under its $8 billion loan programme for Egypt.

The government hopes to raise around $5 billion from the IPO programme in 2024.

They plan to allocate 50 percent of the proceeds from the program to directly reducing debt. Additionally, they aim to establish a cap for the public debt value and extend the maturity of the debt portfolio, according to Minister of Finance Mohamed Maait.

Egypt’s credit rating improvement The improvement of Egypt's credit rating impacts bond pricing and boosts investor interest in injecting funds into the Egyptian market, Mohamed Maher, chairman of the Egyptian Capital Market Association, told Ahram Online.

Fitch ratings has revised the future outlook for the Egyptian economy from stable to positive while maintaining Egypt's rating at B-.

They cited reduced risks in external financing and the robustness of foreign direct investment. Similarly, Moody’s revised its outlook for Egypt’s credit rating to positive.

The two actions came in response to the signing of Egypt’s largest-ever FDI deal for the development of Ras El-Hekma with the UAE worth $35 billion.

A group of IFIs also committed around $57 billion to Egypt to support its economy; including the EU ($8 billion), the World Bank ($6 billion), the UK ($400 million), and the expansion of the IMF loan deal by $5 billion.

He explained that the enhanced outlook of international institutions for the Egyptian economy reflects the increase in dollar inflows, marking a step towards upgrading the credit rating from B- to B+.