MARKET WATCH: Market turns in the worst performance since COVID-19
STOCK ANALYSIS: Speed Medical (SPMD)
Written for Business Monthly - April 2022 Issue
The Worst Performance Since COVID-19
From Feb. 15 to Mar. 15 was the worst mid-month to mid-month market performance since the onset of COVID-19 in March 2020. The EGX 30 plummeted 9.9% to 10,423.1 and the EGX EWI 8.5% to 1,818. Declines outnumbered advances by a ratio of 4 to 1. The performance was exacerbated by the Russian invasion of Ukraine on Feb. 24. In general, global markets felt the brunt of the war, with heightened levels of volatility. But for Egypt, it was a double whammy, with both state revenues and expenditures hit simultaneously. On the one hand, tourism revenues were negatively affected since Russia and Ukraine represent around 20% of tourist arrivals.
On the other hand, the cost of wheat pushed government expenditures higher as Russia and Ukraine provide more than 80% of Egypt's imports. Wheat prices have been up more than 30% since the start of the year.
As for the Egyptian stock market, equities were under pressure as investors became more risk-averse and cashed out. As a result, the country's credit default swap (CDS) spread – a proxy for the country's sovereign risk – skyrocketed beyond 1,000 basis points. That was a direct result of global volatility and the Russia-Ukraine war. Also, the Egyptian pound's 12-month non-deliverable forward rates jumped above EGP 20 per U.S. dollar, suggesting pressure on the local currency.
During the period, foreign investors continued to be net sellers (EGP 2.7 billion) in Egypt's equities. Interestingly, foreign investors also were net sellers (EGP 44 billion) of bonds. It was a warning sign of the headwinds facing the country's finances. With inflation hitting 8.8 percent in February, there was a higher probability the Central Bank of Egypt (CBE) would hike interest rates in its Mar. 24 meeting as inflation encroached on the upper limit of its 5-9% target. Not only did higher interest rates mean higher opportunity cost and hence a higher required rate of return, but it would also mean a change in the CBE's easing stance. Surprising the market, the CBE hiked interest rates by 100 basis points on Mar. 21 while allowing the Egyptian pound to weaken as much as 14% the same day. That brought to mind what happened on Nov. 3, 2016, when the pound depreciated 32%. A weaker pound means cheaper Egyptian assets, including stocks, which is what happened in 2016 and what we started to see following the end of the Feb. 15-March 15 period. But whether history repeats itself this time around is yet to be seen.
STOCK IN THE SPOTLIGHT
Speed Medical (SPMD)
Speed Medical (SPMD) reported good results in 2021, growing its earnings by 71% to EGP 136 million as revenues more than doubled to EGP 365 million. However, the picture is not all rosy. The stock fell 37% during the period, trading 235 million shares worth EGP 216 million. That extended SPMD's year-to-date loss to 42.5%. Shareholders voted to retain all profits to finance future expansion. They also agreed to overhaul its board, with former minister of health Ahmed Sameh Farid becoming chairman.