Egypt shares riskier after violence but foreigners may bargain-hunt

Trading in Egypt’s stock market looks set to shrink further after the massive street protests and violence in the past two days, but any further drop in equity prices could see foreign investors enter to hunt for bargains.

Cairo’s bourse will re-open on Tuesday after a one-day public holiday. After the army threatened to intervene if political parties did not reach a compromise within 48 hours, the fall of President Mohammed Mursi, conceivably a descent into protracted, violent conflict between Islamist and secular forces, appears possible.

“With the Islamist-dominated lower house already dissolved; elections to the upper house declared unconstitutional; and likely amendments/re-writing of the new Egyptian constitution, President Mursi’s potential exit will not go down well with Islamists,” writes Raza Agha, chief economist for the region at VTB Capital in London, in a research note.

“At its worst, this could push the Islamists towards militancy, a la Algeria.”

However, trading patterns in recent weeks have suggested that some investors, particularly foreign funds, believe the Egyptian market is already very cheap from a longer-term point of view. The index lost 12.6 percent of its value in June and is down 13 percent year-to-date.

Given continued hopes that a relatively peaceful political accommodation involving new elections may be reached, these investors may see any further drops in the market as buying opportunities - though trading volumes will stay tiny.

“Things could get worse in Egypt before they get better, but we might add to positions in companies with dollar hedges if prices fall a lot,” says Amer Khan, fund manager at Shuaa Asset Management in Dubai, referring to the risk of a further decline in the Egyptian pound.

Khan says he will only risk small, long-term bets in consumer-driven companies that are seen as in good odor with the government and have good dividend payouts.

“Egypt is a gold mine with companies poised to do well, but the government has done a good job over the last year of not providing certainty in business policies.”

The cost of insuring Egyptian debt against default surged to record highs on Monday and the Egyptian pound is trading at record lows against the dollar.

Elsewhere, shares in Kuwait Finance House are likely to gain after the lender said on Monday that a customer had settled $296.6 million of debt owed to the bank, and that the impact of the receipt would be reflected in its second-quarter results.

Buoyant world markets may add to a positive sentiment in the Gulf. Global equity markets and crude oil rose on Monday as investors snapped up riskier assets at the start of a new quarter, after data showed U.S. manufacturing expanded in June.

For the up-to-the-minute news on the Egyptian uprising, click here.