53% of EGX30 shares traded at lower than book value

The Egyptian Exchange (EGX) has been suffering from a sharp fall amid the decline that has hit many of the world’s markets, driven by the slowing global growth as well as the collapse of oil prices, which impacted the Gulf stock markets.

This situation creates a promising opportunity for long-term investments, especially since the decline has resulted from global events, which recalls the situation following the global financial crisis in the third quarter of 2008.

At the time, the stock market declined from 8,000 points to 3,400 points before it jumped back up, making revenues of over 100% and reaching as high as 7,500 points in the first half of 2010.

Trading data revealed negative data currently, but which can nonetheless stimulate long-term investment. The most prominent of these indicators is that eight shares, 27% of EGX30, are now being traded at lower than their nominal value.

The nominal value of shares is the value of companies on the date of establishment. The nominal value is usually lower than the market value, which increases, pushed by the growth companies achieved since their establishment.

Another vital indicator for investors is the decline in the book value of about 16 shares, equivalent to 53% of the shares listed in the EGX30 index. This is crucial, as the book value reflects the equity, which includes capital and reserves and retained earnings divided by the number of ordinary issued shares.

The book value is often lower than the market value, as the value of assets, such as land and real estate, as it does not take into account the increase in the market value of these assets.

Companies normally expect to achieve growth and reap more profits in the future, which translates into an increase in the market value of their shares, compared to the book value. Therefore when investors buy shares with prices close to their book value, it is better for investment because the price of shares will be covered by companies’ assets.

Managing Director of Mubasher Trade Ehab Rashad said the EGX has been suffering due to global causes, such as China’s growth slowdown, which reflected negatively on most global stock markets, as well as the impact of the collapse of oil prices on the Gulf stock markets, which in turn affected the Egyptian stock market performance.

This shows that the fall is not related to local or internal reasons. The stock market declined since the beginning of this month by 16.39%, from 7,006 to 5,885 points, and by 21.5% in 2015. Collectively, this reveals that the EGX has lost 37.89% of its value in less than 13 months.

This situation is indicative that wealth is made during crises. “The market is able to recover on the long term since the fall was not linked to internal reasons,” Rashad said.

These conditions are commensurate with investment institutions that build long-term investment plans of between one and a half to two years, especially since experts anticipate that the market will grow by 50%-60%. This echoes the circumstances following the 25 January Revolution in 2011, and in the wake of the global financial crisis.

The Direct Investment Manager at the American Cartel Capital for Direct Investment, Ayman Abu Hend, said the sharp decline in the Egyptian stock market is due to fears among Egyptian individual investors and institutions of the consequences of the global and regional crises on the economy.

Abu Hend said there is a promising opportunity to build purchasing centres, especially since “everyone” understands that there is a wide range of stocks that are trading at values lower than their nominal and book values.

The stock market is likely to increase on the medium term because the current drop is not linked to internal reasons. “Moreover foreigners who are worried about global crises do not make up more than 20% of the size of traders in the Egyptian market,” he said.

The technical analysis of the performance of the EGX in the upcoming period is similar to the period following the global financial crisis in 2008. Shares were traded for less than their nominal values, according to Director of the Technical Analysis Division at Osool Securities Ehab Saied.

The year 2016 is not suitable for short-term investment, but will be appropriate for investing institutions waiting for the market to reach above 7,000 points in a year, and waiting even longer for high returns.

Saied said the EGX is mostly affected by oil prices, due to their impact on Gulf markets, which have been the main financial support for the Egyptian economy over the past three years.

Value in Egyptian pounds: