Sunday, April 03, 2011

Egyptian Stock Market Falls After Reopening

Bloomberg Business Week: Egypt Stock Market Resumes Decline After Reopening
CNBC: Egypt Stock Exchange to Re-Open as Chairman Resigns

On January 27th, just days after the first protests against now-ousted leader Hosni Mubarak began, Egypt’s Stock Exchange closed after a two-day 16% drop, and has remained closed for the last seven weeks. There have been several efforts to reopen the market, but officials have pushed back the reopening date for several reasons. First, a wave of labor unrest following Mubarak’s removal from power created concern for investors as workers demanded higher pay and slowed manufacturing. Second, the political future of the country was unresolved and government and stock market officials feared the stock market would plummet given the uncertainty.

Several events came together that placed pressure on officials to reopen the market. Pressed by the threat of removal from the MSCI Emerging Markets Market Index and fearing that prolonged closure will increase the likelihood of a higher sell-off at opening, the stock exchange reopened on Wednesday, March 23rd. Remaining on the MSCI index is important for Egypt’s stocks since many mutual funds and passive investors are benchmarked to the MSCI index and would be obligated to sell Egyptian stocks if Egypt was de-listed. Prolonged market closure had the effect of lowering investor confidence, as many investors were unable to access frozen capital. Therefore, officials felt that keeping the market closed would be increasingly detrimental to the health of the stock market. Furthermore, despite continued political uncertainty, the country voted on Saturday, March 19th on a referendum approving a new constitution, which officials hoped would ease political fears that could affect opening day performance.

The government and stock market officials took several precautions to avoid a massive sell-off of Egyptian stocks. First, market officials instituted “circuit breakers” which are rules that are meant to slow or limit trading in the case of large losses in the stock market. The circuit breakers were set at a 5% drop in the stock exchange, at which point there would be a 30-minute cooling period, and at 10% drop, at which point the market would close for the day. The circuit breakers are intended to promote confidence and encourage stockholders to hold their stock while they reconsider their positions during a “cooling off” period. Second, the finance minister set up a fund worth 250 million Egyptian pounds (approximately $42 million) in case the market needed a capital infusion. Finally, the government led a campaign to encourage Egyptians to invest in the stock market in order to increase activity.

Despite the efforts to encourage investor confidence, the market plunged 8.95% on the first day of trading on Wednesday. On the second day of trading, before the Egyptian weekend, the stock market lost 6.7% of totally value at one point in the day but rebounded to a 4% fall. The rebound was seen as a positive sign as investors feared a second day of heavy losses. Despite the rebound, it may be too early to anticipate that the stock market will soon recover to pre-revolution norms given the continued political uncertainty. While political and social uncertainty remains, investors will be weary of heavy investment in Egypt.


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