DUBAI Egypt stocks are expected to rally once trading resumes on the Cairo bourse as bargain hunters step in following steep declines that preceded mass protests threatening to topple President Hosni Mubarak's 30-year rule.
Tuesday, Mubarak said he would surrender power when his latest presidential term ends in September, angering protesters who want him to quit immediately.
The Cairo bourse has been shut since Thursday, with banks also closed.
"You could argue that the next time the Egyptian stock exchange is open it will be with no Mubarak as president," said Akram Annous, MENA strategist at Al Mal Capital.
"If that is the case, we would not be shocked to see some euphoric celebratory buying if a peaceful transition of power is pulled off."
Or trading may resume with Mubarak still in office.
"This outcome would be met with harsh and painful selling as investors would view it as unsustainable, and nothing more than an opportunity to get out before the next round of social instability," said Annous.
Mubarak's exit would leave a potential power vacuum and Egyptians hoping for lasting change may become disillusioned.
"The problem is that this autocratic system has prevented the growth of any mature opposition," said Abdelkader Abderrahmane, an independent analyst. "Eventually there will be some elites and military types that will strike a deal with an opposition force.
"In return, they will assure their economic interests will not be jeopardized. They will get some western backers to sign off. And presto, a deal is done. Then you will have your front page headlines and celebrations for a little while, before any of the real tough stuff has to be dealt with."
Egypt benchmark's fell 22-percent in three weeks, slumping to a 28-week low of 5,647 points to Thursday's close.
Yet this decline is nothing unusual for the Cairo bourse, said Musa Haddad, head of MENA equity desk at National Bank of Abu Dhabi, pointing to similar previous drops.
"The Egypt market will probably have more downside initially, but should rebound from around 5,000 to 5,100 points once Mubarak steps down," said Haddad.
From Apr. 28 to May 25 last year, the index fell 21 percent, while from October 26, 2009 it dropped 19 percent in five weeks.
"This time, there is a good reason for the decline, but there's little difference in the percentage drop - history repeats itself," added Haddad.
More than 10 Egypt companies have global depository receipt (GDR) programs and their recent performance also points to a likely rebound in Cairo stocks.
Orascom Construction Industries' GDR rose 20 percent Tuesday, rebounding from Monday's 19-month low, although it subsequently fell again in Wednesday trade.
Other Egyptian GDRs made similar gains, including those of Orascom Telecom and Commercial International Bank (CIB), while Market Vectors Egypt Index ETF has climbed 14 percent since Friday's 11-month low.
"The GDRs indicate that selling pressure has gone and things are turning around, but whether that translates onto the Cairo market remains to be seen," said Matthew Wakeman, EFG-Hermes managing director for cash and equity-linked trading.
"People are now seeing a buying opportunity, rather than a stop-loss situation."
Three decades of Mubarak rule has entrenched the ruling elite. Government ties are often seen as key for businesses to flourish, while corruption is rife.
"We would expect big businesses that have largely depended on state influence or support to win business to face the most uncertainty which means the market is in for some growing pains," added Al Mal's Annous. "We would expect big banks to run into near term issues as depositors flee though we'd expect capital flight controls to come into effect to offset this."
Saturday, Egyptian businessman Ahmed Ezz, chairman of Ezz Steel, a close confidante of the president's son and one of the targets for protesters, resigned from ruling party.
"(Ezz's) valuation is very attractive for MENA's largest and lowest cost steel producer, (but) political risk has significantly increased for this name," Scott Darling, Nomura analyst, wrote in a note to clients.
He predicts political uncertainty in Egypt will persist and bank earnings will suffer if continued unrest hurts the tourist industry, although populist reforms will accelerate the emergence of a middle class.
Nomura reiterated its buy rating for Commercial International Bank (CIB), which has an estimated 7 percent local market share, although it warned the lender's shares may have yet to bottom out.
"The current valuation is attractive relative to the strong profitability and fundamentals," Darling wrote. "The expected slowdown in FDIs (foreign direct investment) could also negatively affect the bank's volume growth as most of the Egyptian corporate would seek less capex."
(Editing by Angus MacSwan)