Egyptian stocks are set for only modest gains for the rest of 2010, led by telecoms, real estate and banks, as an uncertain political outlook overshadows accelerating economic growth, analysts and traders said.
Recent second-quarter results from the biggest listed Egyptian companies showed profits mostly rising, but around half of the earnings were below the average forecasts from analysts polled by Reuters.
The numbers have failed to set the benchmark EGX30 index alight and have not prompted investors to abandon a shift in focus from Middle Eastern equities towards the United States and Eastern Europe, traders said.
Egypt's government has raised its target for economic growth to 6.5 percent in the 2010-2011 fiscal year but the index has gained only 2.5 percent this year as foreign investors pulled money out of the region, traders said.
"Most results were actually better than we expected, but I don't think the Egyptian market is going to outperform," said Youssef Kamal, head of the GDR team and foreign markets at brokerage Naeem. "I think maybe the United States will outperform emerging markets like ours for now."
An uncertain political outlook is making some investors loath to take a heavier exposure to Egyptian stocks, as the country prepares for legislative elections later this year and a presidential poll in 2011.
President Hosni Mubarak, 82, has not said if he will seek another term and rumors that he has cancer have unnerved markets as he has no designated successor or vice president, the post he held before taking office in 1981.
Officials dismiss such talk of illness and point to his frequent public appearances.
Hashem Ghoneim, vice chairman of Pyramids Capital, said there was no doubt that next year's election would be won by someone from Mubarak's National Democratic Party.
"Nonetheless, when we know for a fact who it's going to be, that will make a huge difference," he said. "I would see the market going up by year-end, but it's very difficult to say by how much as lots of things could happen in the political arena."
He said he would not be surprised if Egypt's the EGX30 index rose by 10 percent by year-end from its current level.
Naeem's Kamal said some Egyptian retail investors were shifting funds into US exchange-traded funds and that a drop in Egypt stock market liquidity in recent months had drained interest for local mid-caps.
"The interest for more volatile, mid-cap equities is not there in nearly the amount that we saw in the early stages of the recovery when some of them rallied by 100 or 150 percent," he said. "It's harder to convince anyone to do the same today."
Instead the focus was on the biggest stocks such as Orascom Telecom (OT), which has gained four percent since a newspaper report, confirmed to Reuters by two banking sources, that telecoms group Vimpelcom may buy 51 percent of OT.
Orascom Telecom stock has lost a third of its value since late April when Algeria said it would block a sale of OT to South Africa's MTN, throwing its future into confusion.
"Positive movement in the OT, Vimpelcom and Algeria story would dramatically change OT's valuation, and therefore the (EGX30) index," said Ghoneim.
Analysts said real estate firm Talaat Moustafa and Orascom Construction Industries were at the forefront of companies likely to benefit from pent-up demand for housing in Egypt.
They said banks such as Commercial International Bank (CIB) — the index's top performer in 2010 — could see renewed investor interest after EFG-Hermes said it would buy 65 percent of Lebanon's Credit Libanais.
