Foreign Flows into Emerging Markets: Could Foreign Investors Return to the Egyptian Exchange?
Foreign institutions typically allocate capital across developed and emerging markets based on different strategies aimed at managing risk and achieving targeted returns. When developed markets come under pressure, institutions may rebalance their portfolios and reduce exposure to emerging markets, which are generally perceived as higher-risk assets. This can translate into foreign outflows from emerging markets.
Therefore, foreign investor activity in emerging markets does not necessarily reflect a change in the underlying view on the local market. It can also be driven by global portfolio reallocation and changes in investors’ risk appetite.
This could be one of the factors behind the foreign institutional selling witnessed on the Egyptian Exchange in recent sessions.
Global markets came under pressure amid concerns over persistent US inflation and rising expectations of another Federal Reserve rate hike at the October meeting.
However, the latest US data provided greater support for a more cautious Fed stance. The US economy added only 29k jobs in September, versus expectations of around 90k, while the unemployment rate increased to 4.2% from 4.1% in August. Annual wage growth also slowed to 3.0% from 3.1%.
On the inflation front, the PCE price index rose 0.3% MoM in August, versus expectations of 0.4%, while core PCE inflation stood at 3.0% YoY. Together with the weaker labor-market data, these figures reduced concerns over an October rate hike.
The shift in rate expectations supported US equities, with the S&P 500 rising 0.73%, the Nasdaq 1.19%, and the Dow Jones 0.49% on Friday, October 2.
Against this backdrop, continued resilience in developed markets could support an improvement in global risk appetite, potentially paving the way for a gradual recovery in flows into emerging markets, including the Egyptian Exchange.
Under this scenario, we believe that liquid large-cap stocks with strong institutional and international investor exposure could be among the key beneficiaries of renewed foreign inflows, particularly: COMI, ETEL and HRHO
Accordingly, the performance of developed markets and the evolution of US monetary-policy expectations remain key indicators to monitor—not only for assessing global market sentiment, but also for gauging the potential return of foreign flows into the Egyptian Exchange.
Walaa Mosalam - Prime Research
WMosalam@egy.primegroup.org