Mona Mansour
Director
CI Capital Research

AbdelRahman Metwalli Ghoraba
Senior Technical Analyst
Pharos Holding for Financial Investments

How will the stock exchange be affected by the sizeable increase in treasury bond issues during 2010? Will investors exit stocks in favor of bonds?

Not necessarily, as stocks and bonds are different kinds of investments. Those who are investing in stocks seek high liquidity, high risk investments and expect higher returns, while bonds target those investors seeking lower risk investments with a fixed yield. While the total value of traded bonds increased 19 percent between June 2009 and January 2010, trading in stocks expanded by 22 percent (i.e. demand remained strong for stocks as well). The development of the debt market is an important means of financing, especially with the government’s current need to stimulate the economy through developing infrastructure projects.

Not necessarily. During FY 2009, net issuance of T-bills and bonds stood at LE 106 billion yet net issuance remained high at LE 44 billion in H1 2010. Despite the latter, the equity market posted triple-digit percentage gains from March 2009 until present. Accordingly, I do not believe the quantity of 2010 bond issuance will relate directly to a weaker equity market. However, a consistent advance in the Dollar Index (.DXY) at 82.25 accompanied by a dip in the EUR/USD pair below 1.3250, or a decline seen in the CBOC 10 Year Treasury Yield Index (.TNX) below 3.5 percent may contradict this.

Trading on global depository receipts (GDRs) continues when local stocks are suspended. What does that mean for the local stock market?

GDRs are the most common method of foreign listing because they offer access to foreign capital, more liquidity and stock visibility. In addition, they also offer investors the benefits of running a diversified portfolio with international exposure. The reason behind the continued trading on GDRs while stocks are suspended in the local market is that stocks traded on GDRs follow the rules of their own market and are not traded according to local market regulations.

From a short-term perspective, this may create trading and arbitrage opportunities. However, medium- and long-term investors should pay close attention to relatively long vacations, when GDRs continue trading while local stocks are suspended. Therefore, market participants are advised to carefully examine the status and health of their perspective investment time dimension and estimate the risk before relatively long vacations. It is worth noting that both the Egyptian and American stock markets are currently trading roughly at the corresponding levels where Lehman’s bankruptcy was first announced, and have hence reached a critical juncture.

How do you think the stocks of local construction companies will respond to the government-announced increase in price of both copper (LE 2,000/ton) and aluminum (LE 900/ton)?

Copper and aluminum are not major contributors in the construction cost of projects. While steel is, the 25 percent price increase of rebar announced in April didn’t have a negative impact on construction stocks. On the contrary, the CI Capital housing and real estate indices outgrew the EGX 30, jumping 16.8 percent and 14.9 percent month-on-month, respectively, until April 18. This was mainly due to positive news regarding real estate developers. Talaat Moustafa Group’s Q1 2010 sales were up 175 percent year-on-year, and Palm Hills Developments (PHD) signed an agreement with Burooj Properties to expand its client base and extend mortgage facilities to purchasers of PHD’s “Village Gardens” project.

The copper future price (HGc1) has witnessed a steady advance of $125 per pound since the beginning of 2009, and is currently approaching $350-400 per pound. Copper prices are perceived to have a tight upside potential unless the all-time high of $427 per pound clears. Copper-related stocks may consequently benefit in the short term from rising copper prices if they have the ability to pass the price increase to end-consumers. Medium- and long-term investors should keep their eye on the price of $285 per pound since its violation could result in further decline and downward pressure on company earnings.