Egypt's stock market held up well on Sunday despite a weak currency, as foreign investors continued to buy shares - a sign that a devaluation of Egypt's pound, which looks increasingly likely, might not be a disaster for financial markets.
The Egyptian pound briefly hit a record low of about 6.30 in interbank trading against the dollar, a fall of roughly 1.8 percent from its previous close. The central bank launched a system of foreign currency auctions on Sunday in an effort to conserve its falling reserves.
Many analysts believe authorities may no longer be willing or able to support the Egyptian pound; in a research note, Pharos Research forecast a free float would be introduced with the pound weakening to 6.50. Some analysts have a longer-term target for the currency of around 6.80.
But the stock market's calm reaction to the currency turmoil showed the extent to which bad economic news had already been factored into Egyptian share prices, and also that some investors - many of them foreigners - remain bullish on the long-term outlook for equities.
The main stock index ended 0.5 percent higher at 5,442 points, after a 2.2 percent gain on Thursday. Stock exchange data showed the value of buying by foreign investors, though small in absolute terms, was more than double the value of their selling during the day.
The index is up 50 percent from its level at the end of last year and has regained all of its losses since late November, when a political crisis erupted over President Mohamed Mursi's drive to push through a controversial new constitution for the country.
The passage of the constitution, though still the subject of bitter protests by the opposition, is being seen as positive by some investors because it paves the way for parliamentary elections in about two months. A new parliament could restore some political normalcy and allow the government to focus on economic issues.
Prime Minister Hisham Kandil said on Sunday he expected a resumption of talks in January with the International Monetary Fund on a $4.8 billion loan, after the talks were suspended because of the political turmoil.
Depreciation of the Egyptian pound could saddle foreign investors with currency losses and perhaps encourage more capital flight in the short term.
But many investors seem already to have factored a weaker currency into their calculations, and some believe it could actually be positive for the stock market in the longer term, by helping exporters and putting the economy on a stronger footing.
"I believe that the rise of the US dollar against the EGP is reminiscent of what happened in 2003 after the floating of the EGP," said Mohabeldeen Agena, head of the technical analysis desk at Beltone Financial.
"This had a positive impact on the Egyptian bourse as the index rose from 700 points to 12,000 by the end of 2008."
An extended rally from current levels would require the political situation to stabilise, but nevertheless the stock index could rise above 5,600 points by the end of the current week, Agena added.
GULF MIXED
Gulf bourses ended mixed on Sunday with activity mostly quiet because of year-end holidays. Dubai's index, however, ended at a nine-week closing high, up 1.1 percent.
"Investors are betting on good earnings in the fourth quarter and maybe a good rally next month," said Mohab Maher, senior manager at the institutional desk for MENA Corp.
Emaar Properties rose 1.9 percent and Air Arabia climbed 4.3 percent. Property developer Deyaar advanced 2.9 percent.
Arabtec dropped 0.4 percent after Qatar Airways said it filed a $600 million legal claim against Lindner Depa Interiors, a German-Dubai joint venture, for a delay in opening a new international airport in Doha. Arabtec said in November it was taking a stake in the venture's parent Depa Ltd.
Meanwhile, Saudi Arabia's index dropped to a two-week low, more than eliminating gains posted during a rally on Saturday following the state budget announcement. The index lost 0.8 percent.
Saudi Arabia on Saturday set a record state budget for next year as high oil prices allow heavy spending on welfare and infrastructure projects.
While the news triggered some buying interest in domestic demand-related stocks, the expansionary nature of the budget was not a surprise, while the index was dragged down by weak petrochemical stocks after global oil prices declined. Sector bellwether Saudi Basic Industries fell 0.8 percent.
Oman's market was strong with the index advancing 0.8 percent to 5,730 points, pulled up by banking stocks as Bank Muscat gained 2.0 percent.
The index's rise was technically bullish because it broke resistance at 5,722 points, where the index peaked in October and November. The next, minor resistance is at 5,800 points, where the index peaked in June.
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