 New investment vehicles
The Cairo and Alexandria Stock Exchange was established more than a century ago. In 1940 it was the fifth largest in the world but when nationalization began in the 1960s, its activities were frozen for 30 years. The exchanges remained open and it started to reactivate in 1992 following passage of the Capital Markets Law. However it wasn’t until 1996 that stock exchange began to play again an active role in the economy, due largely to the onset of the privatization program, as the government pushed state run companies out the door and onto the market for investment. In March 1999, the International Finance Cooperation (IFC) Index ranked the Egyptian Stock Market first in the Middle East since the beginning of
1999, with a revenue increase of 16.4 percent.
Abdel Hamid Ibrahim , chairman of the Capital Market Authority and Sameh El Torgoman , the new chairman of the Stock Exchange , agree that 1999 will be a year of technological and regulatory advancement for the market. By mid year the market will be entirely computerized, with all 800 or so stocks listed for trading. El Torgoman believes that the computerization will make access easier for investors and should greatly enhance trading. The Ministry of Economy, the Capital Market Authority, and the Cairo and Alexandria Stock Exchanges are also coordinating their efforts in reformulating and fine-tuning the current laws and regulations. "At the present time, the exchange is in the process of upgrading and enhancing its Surveillance Department to monitor the market and to prevent frau. We will be establishing a dispute resolution system within the stock exchange to solve any disputes involving investors and brokerage firms" stated El Torgoman.
A lot of the infrastructure improvements were initiated during the term of former chairman Sherif Raafat. These included electronic trading systems, settlement systems, the establishment of Misr Clearing House, the delisting of defunct shares.
"This helped the stock exchange infrastructure to get to the point where we can move one step ahead", says Ahmed El Helw , Managing Director of Intercapital Securities , a brokerage house which began trading in 1997 and is 51% owned by Commercial International Investments Company. That same year Intercapital Securities ranked first in terms of the volume of trading.
The stock market hit its peak in February 1997 – the year the government’s privatization program really began to take off with attractive new issues being offered to investors via the market. From its peak through the end of 1998, in the wake of the Asian crisis, the market lost 45 % of its value. However it has regained momentum in the first quarter of 1999, and analysts assure it will end 1999 substantially higher than it began. Egypt’s ministers are quick to point out one of the major reasons for the stock market’s decline in 1998 was that institutional investors who were hit in other emerging markets had to reduce their overall portfolios and were forced to pull funds out of Egypt, even though the Egypt market had been relatively unaffected by the crisis. They say Egypt was unfairly tarnished by what was happening in Asia, Latin America and Russia.
Critics of the government’s privatization reform say that the reform program slowed in 1998 in tandem with the stock market because the best companies had already been sold. But many investment analysts don’t agree. "You may say that the easy ones have been sold," says Yasser El Mallawany , managing director of Commercial International Invest Co . (CIIC). "You still have insurance, banking, telecom and infrastructure. We have not really scratched the surface," he added. Mallawany’s company handled the first of the government’s privatizations on the stock market in
1993 when the market was very new and illiquid. CIIC counts itself as the largest commercial investment house in Egypt and recently merged with London based Flemings in a joint-venture that underlines Cairo’s ambitions to become a regional financial hub. Fleming CIIC, which will be based in Cairo, plans on consolidating the existing position in primary and secondary markets in Egypt and build a significant presence in the fund management business.
The specific challenge that the Cairo financial sector now faces is providing enough diverse equity and investment vehicles to investors. Local investors are rich in cash in Cairo, observes El Helw. "They are waiting for good opportunities and are not quite sure how to evaluate their investments. International investors are looking at opportunities and as soon as they identify one they seize it, and they seized a lot of opportunities in Egypt". "The financial figures of 1999 need to show good and convincing growth of earnings so that investors will come to Egypt and invest in a promising market," he says.
|
The overall market capitalization of the Cairo Stock Exchange is approximately $21 billion – compared to a total country GDP of $75 billion in year ending June 30 1998. The market cap will grow much higher after the key sectors of banking, telecommunications, transportation and electricity are fully privatized. "We need very large capitalization companies like telecommunications to come to the market, in order to give it the necessary breadth and depth that may be lacking at the present time
" says Mohamed Taymour , chairman of EFG-Hermes. "As soon as this takes place the market capitalization of the Egyptian market could easily double in size to $40 billion. EFG Hermes is Egypt’s largest brokerage firm and biggest investment banking group. Hermes publishes substantial research on Egyptian companies and the economy and has marketed a number of the government’s privatization offerings. The group is now listed in the Egyptian Stock Exchange, shortly after it was listed in the London Stock Exchange, where its shares are currently traded as Global Depository Receipts (GDR’s).
The bond market is another untapped avenue for growth. The country’s leading ministers have identified 1999 as the year that an active bond market with secondary trading in bonds will be developed. Hamid Ibrahim, head of the Capital Market Authority, emphasizes that the government is very keen to activate the bond market this year. "To organize our bond market we made amendments in our executive regulations and put a condition so that any company that wishes to issue corporate bonds for the public, they have to be rated. I would say that the future of our market would be the bond market." El Torgoman is confident as well. "We acquired a state-of-the-art trading system that is used be several bourses worldwide. We will approach the development of the bond market in the same methodical and systematic way to insure that we have an efficient and well operating market," he says. At the start of
1999 Egypt did not have enough bond issues to construct a yield curve, but the number of private companies issuing bonds was picking up substantially and the government was also offering long term 11 % issues to the public, observes Taymour.
Another leading manager of Egyptian securities is New York based Concord International Investments , started by Mohamed Younes in 1988. It now has $900 million invested in Egyptian securities and a 25 person staff in Cairo and 48 in New York. The company counts itself as the largest international manager in the world invested in Egyptian securities. In September 1998, Concorde was one of three institutional investment firms selected by the government to manage 300 million pounds each in the government employees pension fund.
Younes says that kind of infusion, with a long term outlook, will reduce volatility in the stock market and help educate investors in general about the benefits of taking a long term view of the market Younes says the growth potential for securities firms in Egypt is huge. As his firm already has 41% of the Egyptian domestic mutual fund industry, Concord is more interested in "the overall market expand than in gaining market share". Concorde research shows at present fewer than 120,000 individuals are investing in mutual funds in Egypt, whereas the market potential is for at least 4 million investors who can afford to invest up to 20,000 pounds each. Younes is high on the potential of Egyptian stock market and he sees banking, pharmaceuticals and utility as attractive sectors. "The market has finally realized that prices are ridiculously low," he said in early 1999. "There is still a long way to go and we expect that 1999 will see significant price appreciation".
More and more full financial service firms are beginning to appear in Egypt. "The market is still small in absolute numbers but in percentage terms it has shown positive growth compared to other markets," says Hussein Choucri , a former Morgan Stanley managing director for emerging market in the Middle East from 1987 to 1993, who set up HC Securities in Egypt with Morgan Stanley as a partner since 1997. Today HC Securities and Investment (HCSI) is a financial services holding company active in Egypt and the Middle East engaged directly and through its subsidiaries in investment banking, portfolio management, mutual fund management and recently brokerage activities through the acquisition of an existing company. The company counts 700 million Egyptian pounds under management and is very optimistic about growth prospects. "Until the stock market started, Egyptians had been investing only in real estate or savings accounts. Today someone has to provide services to those companies to raise the necessary capital, handle mergers and provide financial advice in general. His advice to investors? "They should take the time to analyze and understand what is happening here and make the distinction and not put Egypt in the same basket with other emerging markets. It has paid off for those who already came to Egypt. The country is turning around. If you look at it from a macro point of view, you will find a major transformation", says Choucri. |
EGYPT
