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Al-Ahram Weekly 23 - 29 September 1999 Issue No. 448 
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Published in Cairo by AL-AHRAM established in 1875 |
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Al-Ahram Weekly 23 - 29 September 1999 Issue No. 448
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| Published in Cairo by AL-AHRAM established in 1875 |
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Egypt Region International Economy Opinion Culture Comment Focus Special Features Profile Travel Living Sports People Time Out Chronicles Cartoons Letters Common woes in Arab capital markets
By Sherine Abdel-RazekIt might be their geographical proximity which makes the markets of the region suffer from the same market-related "viruses". The fact that they are all emerging economies, in different phases, definitely gives them the same anxieties. This fact was highlighted during the fourth Euromoney Conference held in Cairo last week which focused on the emerging Arab economies. Capital markets in the region mirror many different developments in these economies, so the lion's share of the conference discussions focused on them.
There was unanimous agreement among experts and participants that a lot of improvements are needed in Arab markets. Lack of transparency and a low supply of undiversified, easily liquidated stocks were only some of the defects cited by experts as shortcomings. These defects have deprived the markets of significant amounts of foreign investment, a fact that is reflected in the region's relatively low weightings in international institutions' investment portfolios. The Arab markets account for only two per cent of regional weights in the International Finance Corporation's Global Index (IFCGI) and 0.1 per cent in Morgan Stanley's (MSCI) emerging market index.
According to Giles Bedford from the Middle East Sales Department in Robert Flemings, it is the lack of transparency and unavailable information about Arab markets that keep them from fulfilling their potential. As a salesman of shares in the region, Bedford finds it hard to get information demanded by foreign investors about most of the businesses in the area.
"My frequent visits to the region revealed that there are companies which are getting good results, but what they lack is good investor relations policies," Bedford said. "I am always surprised at how exciting these businesses are and how shy their managers are about explaining their company's strong points!"
"Arab companies have to help themselves and tell us and the investors why they offer wonderful investment opportunities," he continued. "In fact, the Arabs have to learn not only to tell investors about their businesses but also how to sell these businesses."
Bedford cited the example of a recently privatised Egyptian company which is setting a standard for communicating with potential investors in the region. The company invited him to attend a conference for investors. "During the conference, they were very clear in their answers to investors' questions. They spoke about the company's strategy, its future plans, its new products and the challenges it faces. That is exactly what investors are looking for," he concluded.
Beshr Bakheet, managing partner of Saudi Bakheet Financial Advisers, believes that one of the main defects of Arab capital markets is the lack of institutional investors since they represent a steady source of funding. But investments offered by individual investors vary according to the surpluses they have at hand. He believes that with public or even private institutional investors, there are always renewed sources of income. This means that there is a continuing injection of liquidity into the capital markets which sustains the level of demand and stabilises the value of shares traded in the market.
"Institutional investors play the main role in capital markets worldwide," he said. "The value of investments in mutual funds in one country divided by the overall market capitalisation should not be less than 30 per cent in any capital market. However, it is only two-three per cent in almost all the capital markets of the Arab region. Morocco can be considered the only exception as it has $4 billion invested in mutual funds in the market. At the other extreme, Egypt's private pension funds are completely untapped."
Analysing the supply side of Arab markets, one finds many drawbacks. The lack of highly capitalised companies comes at the top of the list. Egypt, which ranks third in terms of market capitalisation after Saudi Arabia and Morocco, is not represented at all in the list of the Middle East's top 50 capitalised companies.
Moreover, almost all the markets have one common feature: they are 50-60 per cent dominated by financial sector companies. The available companies in other sectors offer investors a very narrow range of completely undiversified opportunities.
Moreover, some Arab Gulf markets, such as those in Saudi Arabia and Kuwait, still have ceilings for foreign investors' holdings in locally traded companies. Such ceilings also exist for foreign ownership holdings in what Egypt calls strategic industries.
Arab market experts also criticised the lack of local qualified market participants such as brokerages and investment banking companies since these local players understand the market circumstances better than foreigners. Another related concern was that market analyses done by local market research houses are produced in English with no available Arab translation. "How am I supposed to attract local investors if all the data on the market is in another language?" asked one participant at the conference.
It is not only the nationality of market participants or the language in which analyses are published that create problems. A code of ethics is lacking, and that worries market watchers in the region.
The absence of an ethical code has opened the door for malpractice and insider trading, that is, transactions executed using information that was not available to the whole market. "Insider trading became the name of the game," said a Kuwaiti investor. He also said that although there are regulations forbidding such practices, most markets in the region lack ways to enforce the rules.
Enforceable laws for the capital market, or more to the point their absence, was frequently discussed during the conference. For instance, Sameh El-Turguman, head of the Egyptian Stock Exchange, pointed out that although listed companies are obliged to provide the exchange with their quarterly results, "we still lack the authority to require these companies to provide us with the needed information."
However, being overregulated and thus dependent and controlled by another entity is the problem of some markets in the region. Stock exchanges in Saudi Arabia and the United Arab Emirates are not considered stock markets in every meaning of the word as they are regulated by their countries' central banks.
Markets of the region need more specific indices like an index for the milling or cement sectors and an index for companies slated for privatisation or already privatised, according to Fleming's Bedford.
"We do a lot of things with these indices. We produce evaluations from them, and our investors compare their performances against benchmarks. The more indices we find, the better off the Arab markets are," he said.
