Egyptian shares surged more than 7 percent on Monday for their biggest daily gain in nine years after the Muslim Brotherhood's Mohamed Morsy was named as the first freely elected president, boosting hopes for a violence-free transition from army rule.
The benchmark index closed up 7.6 percent, its best one-day performance since early 2003 and the fourth-biggest in the index's 14-year history, after Morsy’s win was announced on Sunday. The news sparked jubilation among Brotherhood supporters.
Traders, however, were cautious, saying the market euphoria could quickly evaporate if the new president cannot form a government with broad political support.
"I wouldn't judge the market on one day. Let's wait for the rest of the week. One more speech and the market could drop," said Osama Mourad, CEO of Arab Finance Brokerage.
The stock market fell 10 percent during the two-stage election on fears the poll could be derailed or marred by violence. But voting, and the announcement of Morsy’s win against Ahmed Shafiq, ousted leader Hosni Mubarak's last prime minister, passed off peacefully.
"The market is celebrating the lack of violence around this result," said Mourad. "The market was afraid of clashes on the streets."
Yields on short-dated treasury bills offered in Egypt's small secondary fixed-income market fell by 5-10 basis points, a currency trader said.
Egyptian credit default swaps were at 705 basis points, down from 722 on Friday, a 3-1/2 year high, according to Markit.
Treasury yields touched their highest in at least 15 years at recent debt auctions on worries that months of political paralysis could continue beyond the election, making it harder to revive a moribund economy and lure back foreign investors.
The military generals ruling Egypt since the overthrow of Mubarak have promised to hand power to an elected civilian but many Egyptians believe they want to protect their own interests beyond the democratic transition.
Those suspicions seemed confirmed when the military, acting on a court ruling, disbanded the Brotherhood-led parliament on the eve of the 16 to 17 June election runoff, then assumed legislative power and took more control over the drafting of a new constitution.
The army's acknowledgement of Morsy’s close win over Shafiq shows it is willing to concede at least some power to its long-standing adversary the Brotherhood, but traders say the market gains will only hold if Morsy’s government is able to garner broad political support.
"It is very much dependent on the next steps the president takes, what the government will look like and how he will deal with the military council," said a currency trader in Cairo.
Currency risk vs equity gains
Shares rallied across the board on Monday but outperformers included Orascom Construction, which was hit by a slump in construction after the uprising against Mubarak. Its shares jumped 10 percent. Shares of investment bank EFG Hermes, which announced a tie-up with Qatar's QInvest and also became the subject of a takeover bid by a consortium after the uprising hit its business, gained 9.9 percent.
Egyptian shares were beaten down to half their value last year after the uprising against Mubarak, which sent tourism and foreign investment into a tailspin.
They surged 50 percent at the start of this year after a smooth parliamentary vote but, with foreign investors mostly absent, the gains were built on shallow foundations and the market fell anew against a backdrop of persistent political tension.
John Lomax, head of global emerging markets' equity strategy at HSBC, said Morsy’s win was positive because it showed the recent dissolution of Parliament did not terminate the democratic transition, as some had feared.
"My sense is that the Egyptian market is very cheap and if the transition can be successfully relaunched, the market is likely to do relatively well," he said.
For that relaunch to happen, said Lomax, Egypt would need a new constitution and fresh parliamentary elections. In the meantime, foreign investors are exposed to the risk of a weaker currency after the army-backed government drew down foreign reserves to less than half their level of early 2011.
Analysts at EFG Hermes estimate that Egyptian shares are trading at 8 times 2012 earnings, and around 1.1 times book value — a discount to both emerging market stocks and Middle East/North Africa stocks.
"We expect the rally to continue, but don't expect Egyptian stocks to trade at a premium because of the continuing macroeconomic and political overhangs," an EFG Hermes strategist said.
"It is a bit of a tough call between the equity market and the currency," Lomax said. "But it still seems the equity market is extremely cheap and if the political transition can be put back on track, there is quite a bit of upside and that might well offset the potential downside on the currency."
The Egyptian pound has fallen 4 percent in the past year to more than seven-year lows against the dollar but has been supported by buying by the central bank.
The pound closed at 6.055 to the dollar on Monday, its lowest close in more than seven years and down from 6.054 on Sunday.
