 |
Al-Ahram Weekly 4 - 10 November 1999 Issue No. 454 
|
||
Published in Cairo by AL-AHRAM established in 1875 |
| ||
|
Al-Ahram Weekly 4 - 10 November 1999 Issue No. 454
|
||
| Published in Cairo by AL-AHRAM established in 1875 |
| ||
Egypt Region International Economy Opinion Culture Features Profile Travel Living Sports People Time Out Chronicles Cartoons Letters Taking stock
By Sherine Abdel-RazekLast December's appointment of Sameh El-Turguman as head of the Egyptian stock exchange met with general enthusiasm. "At a time when the stock market needs a complete legislative overhaul," remarked one market analyst at the time, "he is clearly the right person for the job."
Ten months later the ever optimistic El-Turguman is unveiling his package of long-awaited regulatory reforms intended to ensure the smooth running of the stock market. By the second half of next year a new mechanism for settling stock market disputes will be in place, a new membership system for brokerages, and revised listing requirements for traded companies. To facilitate the changes a new communication network is to be installed, the stock market's premises will be completely remodelled, training schemes for all players initiated, and a comprehensive programme of education aimed at increasing public awareness of the potentials of securities investment will be launched.
The on-going preparations for the changes began at the beginning of the year, and have continued throughout a period marked by downward market trends. For his part, El-Turguman believes the downward drift is now bottoming out: the cabinet reshuffle, and the strengthening of the ministerial team holding economic portfolios is likely, he believes, to give the market a push in the right direction. And that direction? No less than establishing Middle Eastern pre-eminence for the Egyptian stock exchange.
For the moment, though, El-Turguman is focusing his attention on the nitty-gritty of market supply and demand. Sensitive to criticisms that the bulk of trading activity in securities -- comprising more than 50 per cent of overall transactions -- comprises a narrow range of easy-to-liquidate, highly capitalised stocks, he is determined to widen the trading base.
The new listing rules are expected to help in this respect. "Stock market listing is not a right but something companies should work towards," insists the head of the stock exchange.
Currently, the market suffers from a lack of attractive products -- of 960 listed equities only 30 are subject to substantial trading. The preliminary draft of the new listing regulations is intended to improve the situation by stipulating higher levels of capitalisation for companies seeking to be listed, and tightening disclosure procedures in an attempt to protect shareholders' rights. The draft, which must first be ratified by the stock market's board, will then be unveiled to key market players, including international institutional investors. The final formula is expected to be submitted to the Capital Market Authority for approval by the end of this year, a necessary step given that some of the new regulations will require legislative changes. And while the new regulations are likely, initially at least, to apply only to companies seeking listing, at a later stage it is expected that they will be applied retrospectively.
The fledgling bond market is also receiving El-Turguman's attention. He concedes that this is "a new kind of investment for Egyptian investors and a lot needs to be done on the regulatory framework of the market."
Trading in bonds accounts for less than 10 per cent of monthly transactions at the moment, a figure El-Turguman hopes to increase significantly. Institutions working within this market remain underdeveloped but "it will eventually mature into an important source of finance for Egyptian companies".
A further problem El-Turguman faces concerns the nature of investments. Investment funds have been registering a depreciation in the value of their holdings for some time now. It is a problem exacerbated by individual investors, who, panicked into off-loading their holdings, further push the market in a downward spiral.
The investment funds operating in the market are all open-ended -- investments can be redeemed at any time, which forces fund managers to concentrate on the most liquid stocks rather than those with longer term potential. The encouragement of investment funds operating with a minimum fixed term, El-Turguman believes, is one way to stabilise a market that in the period from January to the end of September this year provided a negative return of 0.6 per cent. (Only five of the 21 local investment funds operating in the market managed positive returns during this nine month period.)
Whatever actions are taken to free supplies, though, will need to be underwritten by the provision of a suitably flexible trading system, accompanied by modified trading rules.
Sameh El-Turguman
"A new order-driven trading system provided by Canada's EFA Software Services is currently under trial," says El-Turguman. It provides a cutting-edge surveillance system which, beginning this month, will monitor the movements of shares and the activities of traders. "The new trading system, like that currently used, is order-driven. The difference is that it can process a far greater number of transactions, and much more quickly, in addition to providing traders with any number of reports."
This system is to be complemented with a new communications network, designed by the Egyptian Tritech company, that will link the Cairo and Alexandria stock exchanges with Misr Clearance and Central Depository, the Capital Market Authority and individual brokerages. At a later stage it will, too, directly process orders from brokers in other governorates.
According to El-Turguman, up-grading the trading system will be followed by a revision of trading regulations. The imposition of a five per cent ceiling on the daily movement of shares, which many analysts consider an obstacle to the free operation of the market, is likely to be a casualty as the pressure for complete liberalisation grows. As a possible interim measure, El-Turguman suggests, short term volatility might be contained by maintaining an extended ceiling on share movement -- "we might," he says, "raise the ceiling to 10 per cent for instance."
The method by which the closing prices of shares are calculated is also likely to undergo some tweaking. At the moment the quoted closing price is the price paid for shares in the final transaction of the day, a calculation that fails to take account of the fluctuating prices at which the same shares have been traded throughout the day. According to El-Turguman: "We are always raising this issue with the exchange board, the economic ministries, and the Capital Market Authority, searching for a more appropriate formula."
It is generally accepted that the indices currently used need to be modified so as to better reflect market performance. The capital market index, the CMA's only general market index, has consistently managed to sound bullish, contradicting the indices of the International Finance Corporation (IFC) and of local investment banks.
As a consequence, the exchange is developing its own index. And not just one: El-Turguman suggests that no one should be surprised if, and when, the exchange comes up with a variety of indices, covering not only actively traded companies, but also individual sectors.
The Egyptian stock exchange's possible inclusion in Morgan Stanley's MSCI index for emerging markets may well be driving the moves to formulate more accurate indices. The American investment bank has, El-Turguman confirms, asked for information to help in its assessment of both the Egyptian and Moroccan markets.
It is a significant move: "Being included in the MSCI means that a proportion of the investment portfolios of those who use the index will be accounted for by the Egyptian market, the proportion being dependent on the weighting Egypt achieves in the index.. The heavier the weighting, the greater the foreign exposure."
More important than being included in the index, El-Turguman is keen to stress, is remaining there once included. "The market has to maintain certain levels of performance so as not to be cancelled."
But it is not only the quality of traded goods that is taking up the attention of the market's senior officials. Improving the performance of those working in the market is also high on the agenda.
"We are deeply concerned with training and education and have started talks with a number of institutions to formulate training programmes."
These talks, El-Turguman reveals, have already resulted in "Investment Appraisal, Project Finance and Risk Analysis", a two-week course designed in co-operation with the Harvard Institute of International Development (HIID) to begin in Alexandria in the second half of October. Participants will include those working in brokerages, fund and portfolio managers. A second course, concentrating on the legal aspects of the market, is to be organised by Harvard Law School. Further courses will target brokers, and are being arranged in co-operation with the Egyptian Capital Market Association and fund managers' associations.
It is not just the supply side of the equation, though, that has been taxing El-Turguman. The mechanisms channelling demand, too, are to be restructured, one avowed aim being to encourage more institutional investors.
"The pension funds' role is still underplayed, hampered by the ceilings placed on the level of investment public pension funds can make on the stock market. We must work towards encouraging greater institutional investment, increasing their ability to invest, and in doing so, injecting the market with the required liquidity."
This, though, will not be done at the expense of the small investor for, according to El-Turguman, "one of my main aims is to increase the number of individual investors from the current 700,000 to five million."
"Both kinds of investors are of equal importance: they balance the market, provided, of course, that individual investors are sufficiently well informed not to panic and abandon the market at the first hint of trouble."
Brokers, too, will be brought within the new regulatory framework. Full membership of the exchange will be restricted to brokers entitled to receive and act on orders. Others will be allowed only to receive orders. This two-tier brokerage system will be differentiated on the basis of capital adequacy ratios, and the research capabilities of individual brokerage companies, and is likely to be in force by the first quarter of next year.
