Markets Uncertain as Egypt Violence Waxes and Wanes

Bottom Line: Investors are pulling out but the Egypt stock exchange is at its highest since the ouster of Mubarak in 2011, as protests and violent clashes continue sporadically and the potential for chaos or political stability shifts back and forth.

Analysis: Overnight on 6-7 October some 50 people were killed, five of them outside of the capital city, and nearly 270 people were wounded across the country in clashes between Islamists and security forces, primarily with Egyptian security forces opening fire on Muslim Brotherhood demonstrators; tensions were particularly high on this date due to celebrations of the military's role in the 1973 Arab-Israeli war.

That the military has overstepped is demonstrated by the pressure on Washington to distance itself. Last week, Washington announced it would cut back on the $1.3 billion in aid the Egyptian forces receive from the US. This is only a temporary halt in aid, which will see a halt (for now) in the planned delivery of Apache helicopters, Harpoon missiles and tank parts as well as a planned $260 million cash transfer and a $300 million loan guarantee. However, other forms of aid will not be reduced at all, including counter-terrorism aid and general economic assistance. Washington's move should be perceived not as a snubbing of the Egyptian military but as the easiest way to relieve pressure coming at it from two different camps-those who would suspend all military aid to Egypt and those who believe Washington should grant the Egyptian military greater support (such as Israel).

Many multinational corporations have scaled down operations in Cairo since the 3 July coup, with Apache Corp., Chevron, General Motors, Electrolux, BASF, BG Group and BP all either reducing staff in Egypt or suspending operations in recent months. At the same time, analysts predict that international property investors will increasingly shift focus to sub-Saharan regions, leaving high real estate vacancy rates in Egypt-primarily in central parts of the capital. At present, estimates are that some 25% of prime office space in Cairo is vacant. Plans to bring in luxury designer houses to Egypt-such as Harrods, Gucci and Prada-are also on hold now and again the choice will be sub-Saharan African venues such as Lagos, Nairobi, Lusaka and Accra.

Recommendation: Despite this, our assessment is that the military will maintain control of the situation largely because the general, secular population is not speaking out against the existing police state, the curtailing of freedoms or the arbitrary arrests of Islamists on vague charges. Egyptians are desperate for stability and for now believe that the military-led by General Abdel Fatah el-Sissi-is the only alternative. To that end, there is already subtle campaigning by al-Sissi's supporters for him to run in the next elections, which are scheduled for next year in the best-case scenario. Muslim Brotherhood supporters will continue to stage protests-on and off-and the military will continue to fight them back. As long as the promise of stability and economic progress seems real, the current status quo will remain in place.

There are other signs that the market is confident in Egypt. On 13 October, Egypt's benchmark stock index rose 0.9% to 5,986.8--its highest since the fall of Mubarak in early 2011--on optimistic speculation over political stability and economic growth.  Some $68 million (about 468 million Egyptian pounds) in shares were traded-up over 120 million pounds on the daily average for this year alone. The biggest trading shares were those of Commercial International Bank Egypt SAE.