Published on Arab Voices

The market score on Egypt's elections and revolution

ImageThe Egyptian election brought a modest gain to the Stock Exchange.  The EGX30 is up 6 percent since before elections in November and the broader EGX100 is up 1 percent.  This suggests that the market is cautiously optimistic that the new parliament will be pro-business.  The biggest gainer is Telecom, up 16 percent , though this may be related to renewed trading of Orascom after the company split, and less to the election.  Still, other gainers are chemicals, construction and materials, financial services (excluding banks), and industrial goods and services (including automobiles), which are all up about 5 percent.  Importantly, none of the 12 sectors are down more than 2 percent since the beginning of the election cycle (see chart below).

The response is in line with recent news reports, highlighting the market-based economic platform of the Muslim Brotherhood.  For example, an article in the Washington Post reports that they want to revive investment and tourism and create jobs through the private sector, while they have historically been against nationalization and big government.  Members of the Brotherhood have already distinguished themselves in the local provision of services, and are thus credible in their stated desire to improve national services and reduce corruption.  Their openness to IMF lending is another sign of their economic prudence.

This is good news for Egyptians who are depending on the private sector for creating much needed jobs.  But, now the time has come to make good on the talk.  The market will be keeping score.

There is also a great deal of ground to make up.  While elections have had a small positive impact, the economic and political uncertainty of the revolution dealt a strong blow to the Exchange—down about 45 percent the beginning of last year.    The biggest loser was basic resources which lost 73 percent, followed by real estate and travel and leisure, both of which lost about 65 percent.  The sectors which performed the best, down 20-25 percent, are chemicals, construction and materials, healthcare and pharmaceuticals, personal and household products, and telecoms.

While  a good deal of the market decline is due to uncertainty and a deterioration in economic prospects, another part may be due to an end to the government favoritism from which many firms profited.  In a well-known article on Indonesia, Raymond Fisman shows that stock returns on firms with connections to the Suharto family dropped relatively more sharply in response to rumors of Surharto’s ill health.  The intuition is that political connections were an important determinant of profitability and hence stock returns.  Elevated risk of a break in those connections meant lower profits and a market price decline.

In the case of Egypt, which currently ranks worse than Indonesia on Transparency International’s Corruption Perception Index, some share of the market decline may thus be a result of a revaluation that places less weight on political connectedness, at least with the former regime.  Interestingly, a number of the sectors where indices dropped by less following the revolution have extensive military production.

Market Returns in Egypt, by Sector
Click to enlarge image

Source:  Author’s calculations using data from The Egyptian Exchange. Note: Post revolution is from January 2, 2011 to January 23, 2012.  Post election is from November 24, 2011 to January 23, 2012.


Caroline Freund

Dean of the UC San Diego School of Global Policy and Strategy

Join the Conversation

The content of this field is kept private and will not be shown publicly
Remaining characters: 1000