The last few months have seen significant developments in several regional share and bond markets.

Without doubt, the region's star performer in recent months has been Egypt. The performance of the Cairo stock exchange has been stellar. In 1996, the Egyptian bourse delivered a return of over

45 per cent, making it one of the world's best performing markets last year. The bull run has continued this year and by early March, equities had delivered further gains of 28 per cent, in spite of a pause at the end of February. According to All Hobballah of HSBC James Capel, there is a surge of domestic and international money pouring into the market, which is driving up share prices.

New mutual funds are being established, whilst a number of regional funds have dramatically increased their weighting in Egypt. For instance, Barings Asset Management's Simba Fund, which invests across Africa, has more money in Egypt than any of the continent's other markets, having trebled its holdings in Cairo. Even the Oryx Fund, which primarily invests in Oman, has added some Egyptian holdings to its portfolio, in an attempt to benefit from the acceleration in share prices.

Egypt's recent economic performance is very impressive. GDP growth is averaging five per cent, inflation has fallen to 5.4 per cent, the current account and budget are both almost in balance.

Egyptian bonds are now ranked on par with Latin America's star economy Chile, boosted by the significant debt write-offs which resulted from Egyptian support in the Gulf War.

But it is in the stock market where Egypt's new found international credibility is most noticeable. Recent privatisations have been very successful and the government is committed to selling off $2 billion worth of assets every year. Over-subscriptions for the flotations and the recent surge in share prices suggest that demand remains buoyant. The bull run has even led the administration to consider selling some businesses which were previously thought of as sacred cows. Analysts predict that the state-owned telecoms network may be floated in a mammoth $6 billion capital-raising exercise.

Although the bulls are rampant in Cairo, some are warning that exuberance may lead to valuations becoming unrealistically overstretched. Albert Momdjian of HSBC believes a temporary falling back and consolidation in February, which was followed by another sharp rise, shows the market still has further to grow. But Tristan Clube of Martin Currie Fund Managers is more circumspect. He believes that buyers coming into the market need to be very selective.

After a sustained period in the doldrums, Israel's market has also recovered its poise. The turn in sentiment began in November and, over the ensuing three months, the main index rose by almost 30 per cent.

Most analysts were surprised by the upswing in prices, but it undoubtedly lifted the air of gloom that had pervaded the Tel Aviv exchange for many months. They also welcomed the noticeable increase in trading activity, although volume is still markedly lower than it was in 1993-94, at the market's peak.

The main driving force appears to have been buying by domestic and foreign institutions who found the valuations on a number of stocks compelling - a combination of falling share prices and rising corporate earnings has undoubtedly left equities undervalued. Individual investors have mostly remained on the sidelines, unwilling to re-enter the market having been so badly burned by the 1994-96 bear phase, which was triggered, in part, by rising interest rates and unfolding scandals involving insider dealing and share price manipulation. David Rosenberg, a local analyst, points out that, "for the rally to be sustainable, small investors will have to join in, and there is scant reason to believe they will."

Ya'acov Sheinin, a local analyst, believes that there is still plenty of upside potential. "The market is still trading at a 15-20 per cent discount to its economic value," he says, adding that if the Netanyahu government succeeds with its proposed economic reforms, "the market can rise to a higher league." Haim Abraham of Bank Leumi securities agrees, adding, "there are plenty of companies here that we think are worth buying."

Indeed, with the market now only back to its 1994 level, in spite of significant earnings growth and cumulative inflation of 33 per cent since then, Israel was on line to be one of the region's best performing markets in 1997.

However, recent political unrest and calls for the instatement of economic levers, including the re-introduction of the Arab boycott of Israel, could scupper that aim.

After a sustained upward re-rating on the Casablanca bourse, some analysts are voicing concerns about the short-term outlook for Morocco's stock market.

Last year, Morocco was one of the most successful markets in the world, delivering an impressive return of 30 per cent. The surge of domestic and international funds into equities has continued this year, pushing the index up by a further 15 per cent.

According to Anas Alami, an analyst at local brokerage Upline Securities, the rise is not yet alarming because it can be partly explained by better than anticipated corporate earnings, which increased by 26 per cent.

Max Camier of Framlington's Maghreb Fund agrees that much of the rise can be justified, due to good rainfall which reversed the effects of 1995's drought, and by corporate restructuring in advance of the free trade accord that Morocco has concluded with the European Union. However, he says, "we are not selling Morocco yet, but we are slightly switching to Tunisia."

One clear sign that the Casablanca bourse may be overstretched is the indication that there is an emerging supply/demand disequilibrium. The bourse's inclusion in the IFC's benchmark emerging markets index has attracted much foreign money, whilst it is estimated that the total assets of domestic mutual funds doubled in 1996. At the same time, there has been only a limited supply of new issues due to a stalling in the privatisation process.

Too much money chasing too few stocks is a problem that has bedevilled neighbouring Tunisia for several years. With price/earnings ratios in Casablanca reaching 16, the Tunis market is beginning to look more attractive, although it is arguably still overpriced.

With only 30 securities listed in Tunis, and a phenomenal surge in mutual fund assets, price/earnings ratios soared into the mid-twenties. Last year's 10 per cent fall, which has been followed by a further 16 per cent drop in the first months of 1997, has begun to correct that situation. Across the market, p/e ratios are now closer to 22.

Recent falls have led to some selected buying opportunities, such as Palm Beach Hotels, which Framlington highlights as a potential buy now that the stock is trading at a low p/e of nine, after losing more than a third of its value in the market correction.

However, until there is a significant improvement in the supply of equities in Tunisia, the market's upside potential - and its ability to attract foreign money - appears to be limited.

Although Algeria does not have a stock market, it has begun attracting the interest of some international institutional investors. As shares are not freely available, attention is focusing on the country's bonds.

Although the country has been plagued by political instability for a number of years, it has delivered a marked improvement in its economic position. The catalyst has been the structural adjustment programme implemented by the government of Lamine Zeroual under the auspices of the IMF and the World Bank. Further support has been provided by the improvement in world oil prices last year.

A number of measures have been introduced, including sharp cuts in fuel and food subsidies, a decline in public sector real wages and tax hikes. Furthermore, the government has committed itself to privatising a number of state-owned companies. It is envisaged that this will also involve greater private sector involvement in public sector activities, such as the provision on municipal services. Further liberalisation measures are slated for implementation, including tariff reductions and tax reforms.

The reforms have begun to bear fruit. Real GDP growth in 1995 and 1996 was four per cent per annum and a similar outcome is anticipated this year, in part due to strong winter rains. Inflation has also been brought under control, with the annual rate falling from 22 per cent to 15 per cent. The administration's budgetary position has improved with a substantial surplus in 1996. Furthermore, last year's debt rescheduling accord, which was concluded with Algeria's bilateral and commercial creditors, has substantially reduced the debt service burden.

The result of this favourable economic backdrop has been a sustained rally in the price of Algerian debt, which has risen sharply over an 18-month period. By earlier this year, the yield had been cut to about nine per cent.

As US investment bank Salomon Brothers concluded in a recent report, as a result of the rally in Algerian debt following the August restructuring, it is no longer cheap. However, Salomons also point out that although fairly priced near current levels, short-term market volatility can create buying opportunities.

If President Zeroual's attempts to pacify the country's political situation succeed, then Algeria may soon have a stock exchange to attract international investors as well.