KEY THEMES
Last Monday (the start of the global trading week), global markets felt the brunt of concerns over the potential credit default by China Evergrande Group, which we referred to yesterday. However, global markets recovered much of their losses yesterday and today as well. However, in Egypt, the story is different. Small-cap-laden EGX 70 EWI fell some 9.3% so far on a week-to-date (wtd) basis (through yesterday), almost double the drop seen in EGX 30 which fell 4.5% in the same period. Along with global jitters, we believe continued weakness in the local market has been self-inflicted by three main local events:
(1) Uncertainty about the capital gains tax and its implications on trading.
(2) Sharp falls in the once-high-flying constituents of EGX 70 EWI triggering margin calls, which further exacerbates the impact.
(3) Local institutions ending yesterday as net sellers with some EGP224mn, probably in anticipation of funds redemption or potential margin calls.
This led EGX 30 to fall in tandem, albeit at a smaller magnitude. We note that EGX 30 has been lagging EGX 70 EWI for some time now (ytd: EGX 30 is –3%, EGX 70 EWI is +21%). In other words, it’s the same old vicious cycle we get into once stock prices of highly-marginable names start falling. When the pressure of margin calls subsides, we could see the market stabilizing once more. A sign of optimism is that global markets are calmer today after an onshore unit of China Evergrande Group said it would make an interest payment this week.
Elsewhere, Egypt’s real estate exhibition City Scape starts today through Saturday, 25 September, which may attract attention back to the sector following the sell-off seen recently.