In an inverted image from the previous week, Gulf markets roared and Egypt flopped in the 22nd week of the year. However, the factors underlying the market movements remained unchanged: Influences of MSCI classification drove three markets in the Gulf while political developments ruled in Egypt. On the weekly balance, four MENA exchanges were flat, six were up and two dropped.
Egypt’s election
The Egyptian Exchange traded up at the start of the week and reached a new post-Arab Spring high intraday on Monday before retreating. After the market closed on Tuesday, the EGX 30 weakened further on Wednesday while the predicted presidential win of former army leader Abdel Fattah al-Sisi was sealed on an unplanned third day of voting. Indications such as provision of free public transport on that day and threats of fines for non-voters suggested that the voting period was extended in order to increase participation and strengthen the appearance of legitimacy of Sisi’s mandate.
With Sisi’s win, the EGX 30 started Thursday with gains but then reversed, ending the day with a 3.5 percent drop due to news that the cabinet was preparing to levy a 10 percent capital gains tax on stock market investors. Media reports on Thursday gave the impression that the information arrived out of the blue, first spread in local media and then confirmed by finance minister Hany Dimian in an interview with Reuters.
The same day, the Egyptian Exchange posted an announcement it attributed to the finance ministry. The one-sentence statement said “Reference [sic] to what has been circulated about imposing taxes on capital gains achieved in the Egyptian Exchange, ministry of finance confirmed that the calculation of the tax on profits will be on the net value of the market capitalization portfolio by the end of year, compared to its value at the date of approving that law regardless of the purchase date preceding this law, taking into consideration to relay any losses achieved by the investor for the coming 3 years.”
Curiously, attempts to introduce a capital gains tax first on initial public offerings and then on incomes from share sales were twice announced and dropped in Egypt’s recent past — in December 2012 and March 2013 — both by the government of former President Mohammed Morsi.
Investors in the Egyptian bourse were confused and outraged by the latest tax announcement as much as by the announcement’s disorganized presentation and timing on the day when expectations were focused on the outcome of presidential elections. On June 1, the Egyptian Exchange was still in upheaval and trading was suspended from 11:20 am until 11:45 am. By market close at 2:30 pm the EGX 30 was nonetheless down 4.2 percent for the day.
MSCIng the thrills
Compared with the drama on the Cairo financial scene, the market movements in the rest of North Africa and the Levant could not fascinate. The Moroccan, Tunisian and Jordanian markets each fluctuated by less than 2 percent to the downside, but all three recouped that ground and closed the review period flat when compared with the end of the week prior.
The Beirut Stock Exchange, however, ended a period of small index movements with a 20 points gain on May 29–30, which looked to be the biggest two-day rise in the BLOM Index since mid-January. According to the BSE Bulletin, Bank Audi and Solidere were the key gainers on each of the two days. Daily gains ranged from 1.3 percent to 2.2 percent for the two share classes of the real estate company. Bank Audi GDRs rose 3.1 percent on May 29 and the bank’s common shares advanced 3.8 percent the following day.
Massive trading volumes drove the markets in Qatar and the United Arab Emirates on May’s last trading day as the much discussed MSCI Emerging Markets index’s inclusion of 19 stocks from across the three markets triggered share buying by international funds. This drove the ADX General Index 6.6 percent higher on the week, followed by gains of 5.3 percent in Qatar and 4.6 percent in Dubai. The QE Index’s rise brought it to a new all-time high.
Passive activity
Index tracking or ‘passive’ funds hold stock portfolios whose composition mirrors that of an index. When compared with active funds, whose managers pick stocks based on a fund’s respective criteria and buy and sell shares according to their own research, passive funds offer investors much lower operating costs.
One can think of passive funds as financial markets’ equivalent of Carrefour and Walmart, while active funds are akin to Neiman Marcus or Harrods. Active funds will dote on investors with a taste for tailored products in exchange for a hefty fee, but in terms of value for cost, the passive funds occasionally deliver more.
As May 29 was the first day for passive funds to compulsively adjust their portfolios in accordance with the revised MSCI EM index composition, their demand pushed share prices for 12 out of the 19 index entrants from the UAE and Qatar up by more than five percent each. However, the market dynamics also saw stocks go up which were not part of the MSCI selection.
In Abu Dhabi, eleven companies rose by between five percent and the daily limit of 15 percent on Thursday, of which four were driven higher by the MSCI EM siren song. These four were National Bank of Abu Dhabi, Abu Dhabi Commercial Bank, First Gulf Bank and Aldar. NBAD, which experienced extreme demand when compared with its average trading volumes, and ADCB rose at the upper limit; Aldar and FGB respectively gained 7.3 percent and 5.6 percent. The seven other ADX gainers of more than 5 percent included one bank, one insurer, two agricultural firms, a construction materials company, a services company and the cross-listed Qatari telco Ooredoo, which is an entrant to the EM index.
On the Qatar Exchange, however, Ooredoo was only a small gainer on Thursday, moving up just 0.6 percent. In Doha, the companies with share price gains of more than 5 percent each included MSCI EM entrants Vodafone, Barwa, Al Rayan Bank and Qatar Islamic Bank. Of the six other Qatari entrants, including Ooredoo, three saw their share prices go up while three dropped. Elsewhere on the QE, the Qatar National Cement Company’s 6.4 percent gain made it the one strong riser that was not part of the MSCI selection.
On the Dubai Financial Market, some of the EM debutants showed strong gains, as did several others. Emaar Properties and Arabtec pushed 7.2 and 6.3 percent higher while Dubai Islamic Bank added 6.2 percent. The one stock in Dubai to climb at the daily limit was the stock market operator, DFMCO. Outside of the debutant group, Ajman Bank gained 7.1 percent, Dubai Investment Co 5.8 percent and Shuaa Capital 9.6 percent.
Gulf media cited both analysts and research into behavior of reclassified markets to caution that the passive funds — in comparison to active funds’ far smaller assets under management — must not be expected to inject further massive amounts into the UAE and Qatari markets and that post-upgrade, further gains in the markets should not be speculated on.
Of the four other GCC markets, Oman’s MSM 30 was the strongest gainer with 1.7 percent, followed by Tadawul with 0.7 percent. The Bahraini bourse index was flat and the KSE Index gave up 0.8 percent in a trading week that was cut one day short.
