Egyptian stocks rebounded on Monday after deadly sectarian clashes in Cairo shook investors still uncertain about the recovery in the country’s security situation.
After falling 1.2 percent to its lowest level since March 24, Egypt's benchmark index was quick to rebound on Monday, closing 1.14 percent higher.
Earlier losses had been driven by Saturday's clashes between Muslims and Christians in Cairo. Witnesses on the ground tell CNBC that the situation remains tense at various locations across the capital.
At least 12 people were killed in the violence and more than 200 wounded after Salafists gathered at the Saint Mina Church in the district of Imbaba. The move came following rumors Christians had abducted a woman who converted to Islam. A verbal exchange then escalated into a confrontation with gunfire and firebombs. The army intervened and arrested 190 people.
The country’s Prime Minister, Essam Sharaf postponed a planned trip to Bahrain and the United Arab Emirates to hold an emergency meeting on Sunday.
Prince Abbas Hilmi, senior managing director at Concord International Investments, told CNBC that the lack of law and order is exacerbating the situation.
“There’s been a breakdown in security. The present interim government has got to put on top of its priorities to try and get the security forces sorted out.”
The latest sectarian clash is seen as a setback in the country’s treacherous transition towards a civilian-led government by the end of this year. It’s also keeping traders on edge as foreign direct investment and tourism, two key sources of economic activity, are particularly susceptible to events like that.
Attacks on Christians, who make up about 10 percent of the country’s 80 million people, have increased over the past year.
The EGX remains the worst performing emerging market index year-to-date. Credit Agricole CIB said in its latest note that the impact of the crisis in Egypt will “continue to be felt strongly in the coming two to three quarters with a fall in output, decline in consumption and confidence.”
There has been considerable concern about what role Islamic movements will play in shaping the post-Mubarak Egypt. Therefore, the upcoming elections will "be pivotal for the possible return of both foreign investments and tourists."
Hilmi doesn’t believe the Salafists, comprised of ultraconservative Muslims, enjoy a large representation among Egyptians and rejects worries that the Muslim Brotherhood, if empowered, would pursue policies detrimental to foreign investment.
“I don’t see them ever turning against free enterprise”.
Marios Maratheftis of Standard Chartered told CNBC that the latest developments in Cairo are “a reminder of the risks, and a reminder that Egypt is in transition”.
He believes that over the past few weeks the market was not sufficiently pricing in the uncertainty and risks of that transition. Hence foreign investors will continue to seek clarity on the political front before accepting certain valuations. However, for the medium term, Maratheftis is more upbeat, arguing it is “a fantastic market with great opportunities”, citing its large and young population.
Hilmi agrees, pointing out that Egypt has a well-diversified economy and is a “very attractive story as far as emerging markets are concerned.”
“Companies are continuing to do reasonably well, despite all that happened. It is very encouraging.”
The Central Bank of Egypt (CBE) sold 5 billion Egyptian pounds ($830m) in domestic treasury bills as planned on Sunday. Meanwhile, the Washington Post reported that the Obama administration was planning to provide Egypt with a $1 billion debt relief package.
In addition to the local EGX, keep an eye out for the Market Vectors Egypt Index ETF this week.