(Ecofin Agency) - In Egypt, inflation reached 36.5% in July 2023. The EGX 30, the index of the “most highly capitalized and liquid stocks traded on the Egyptian Exchange,” gained 8.64% in 30 days. Faced with eroding economies, investors are looking for havens of stability. This trend, which is not limited to Egypt, can also be observed in Ghana and Nigeria.
In Egypt, the price index, also known as inflation, reached 36.5% in July 2023, according to data provided by the country's Central Bank. This figure marks the highest level for this indicator in two years. This reality is accompanied by an increase in the overall value of companies listed on the stock exchange. The EGX 30 index, which groups the major companies listed on the Cairo Stock Exchange, posted the best performance among African stock market indices over the last 30 days, with an increase of 8.64%. Over the last 12 months, its value has risen by 62.2%.
In the previous trading week, the three African companies with the best stock market performance were all Egyptian. What's more, five of the top ten performers were also Egyptian companies. It seems widely accepted that investors are seeking a form of refuge from rising prices, which are reducing the value of their savings and weakening returns, particularly for those invested in products such as bonds.
Egypt is not the only African country where investors are turning to the stock market to cope with inflation. Ghana also experienced this phenomenon, as inflation reached record levels in 2022 and the currency suffered a depreciation. Nigeria is also facing a similar situation, although the circumstances are different.
Choosing the stock market as a haven seems a logical decision for investors, given the restrictions on capital outflows from the country. Repeated devaluation of the Egyptian currency would result in effective recognition of the latent losses arising from this situation. However, speculating on the stock market is not without long-term risks.
Unlike Nigeria, where investors can count on a low valuation with room for growth, the Egyptian stock market has an overall price/earnings ratio of 7.5x. This means that a current investment would require seven years of constant earnings to recoup the capital invested, not counting dividends and capital gains.
Some analyses of the Egyptian financial market point to prospects for improvement. Investors find confidence in the fact that, over the last three years, profits and total sales of listed companies have risen by 37% and 30% respectively. The current consensus seems to be that this pace will be maintained.
Part of the solution to inflation lies in Egypt's ability to mobilize foreign exchange to support wheat purchasing costs, which remain high compared to pre-Russian invasion levels. However, this is a complex solution for Egypt, as it is for many other African countries. The next review with the IMF promises to be a difficult one, with the prospect of further restrictions being imposed.