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Al-Ahram Weekly 13 - 19 January 2000 Issue No. 464 
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Published in Cairo by AL-AHRAM established in 1875 |
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Al-Ahram Weekly 13 - 19 January 2000 Issue No. 464
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| Published in Cairo by AL-AHRAM established in 1875 |
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Egypt Region International Economy Opinion Culture Heritage Special Books Profile Travel Sports People Time Out Chronicles Cartoons Letters Keeping up a gentle simmer
By Yasser SobhiThe stock market in Egypt is still vulnerable to fluctuations in foreign investments. When news says that foreigners are coming, the prices go up. When a rumour says foreigners are selling, everyone pulls back from the market.
In fact, the average volume of foreign transactions is around 30 per cent of the total volume of transactions in the market. Foreigners own roughly some five per cent of all market capitalisation.
"It's not only a matter of volume. When a group of investors are getting out of the market there should be an effect. But more important is the psychological effect, which is stronger. The individual investor in Egypt looks to the foreigners, as they know better than him, they have information he is missing, so he follows their movements. It's due to a lack of knowledge, experience, and above all of confidence," says Hussein Choucri, president and chief executive of HC Securities, one of the leading investment banks in Egypt.
The correlation between foreign investors attitudes and the prices of stocks has become increasingly clear since 1996. Before that date, foreigners were not attracted by the market. Total portfolio investments did not exceed $100 million. Only after the appointment of Kamal El-Ganzouri as prime minister in January 1996, followed by a series of reform decisions, including the adoption of an ambitious privatisation programme, did foreign investors start to look to the market. During 1996, foreign portfolio investments reached $800 million. The flows boosted the market and the prices of equities rode the wave. By February 1997, stocks had become overpriced and international investors began to liquidise their holdings and leave the market. Only local investors continued to buy, failing to evacuate quickly when the market began to fall.
While many people saw this as a necessary period of correction the market failed to successfully rally until last year. During this period, portfolio investments stagnated at around $1 billion as the majority of foreign investors adopted a position of wait and see.
Several factors compounded the situation. The Asian financial crisis made international financial institutions more cautious about investing in emerging markets. And while the Egyptian market was not subject to strong withdrawals, growth was negatively impacted.
The massacre of tourists in Luxor in 1997 caused further damage, as the tourist industry shrank. Meanwhile, oil prices fell sharply, with serious consequences for one of the main sources of foreign reserves. Foreign investors were further alienated by a series of government decisions last year to place barriers in the way of imports, and by the failure to deal with foreign currencies in the market.
The last two years did, however, see some consolidation among financial institutions working in the capital market, Flemings with CIIC, ABN amro with Delta and Citi group with EFG-Hermes among others.
It was only last October, with the nomination of Atef Ebeid as head of the new cabinet, and with a widened portfolio for Youssef Boutros Ghali as minister of economy and foreign trade, that investors started to regain their confidence. The value of shares traded by foreigners consequently increased from LE877.7 million last September to LE1.4 billion in October, and then soared to almost LE2.5 billion in November. The same period saw a general increase in the prices of equities across all sectors.
"Foreign investors gave a boost to the market. In fact, the turnaround of the market was fuelled by fresh external flows of capital," reports Amr El-Qadi, head of the research department at EFG-Hermes.
Accelerated privatisation, indicators that the Egyptian economy is out-performing its emerging competitors from several international agencies and institutions, all underpinned the upswing.
Morgan Stanley's decision to list many Egyptian stocks on its index for emerging markets will act only to encourage more flows, while the announcement that Turkey is to join the EU, and the resumption of talks between Syria and Israel have helped promote a better assessment of the region.
"When the region is more attractive, all the markets in the region benefit, especially Egypt. The Egyptian economy is relatively strong within the region and the prices of stocks are attractive," says El-Qadi.
The Ministry of Economy's monthly report on the performance of emerging capital markets shows that Egypt was positioned sixth among 34 emerging markets in terms of dividend yield. And the price-earning ratio in the Egyptian capital market is low, which means more opportunities for investors.
"Foreign investors are looking to Egypt as an emerging market with strong foundations. They already know the story of the successful reform programme and they are looking now to continue that route. They are investing in stocks with high-liquidity, like MobiNil and CIB, but they are also searching for quality before quantity in the market," says Maguid Shawqi, capital market advisor to the minister of economy.
In seeking to reduce instability, is the placement of barriers in the path of any sudden withdrawal from the market an option for Egypt? The answer seems to be no.
"Countries that did so suffered from political and economic problems and instability that Egypt has avoided. Here the Central Bank monitors banking credits very closely, there is no strong external debt for the private sector or any possibility of an economic crisis. So there is really no need to place restrictions on capital flows," argues Shawqi.
The idea is also rejected by the private sector.
"We cannot say that we want to integrate the international economy with a local capital market and then make conditions upon entry to the stock exchange. It should be open to the entry and departure of the foreign investors as they wish. I don't believe in the conspiracy theory. Foreigners are choosing the best opportunities in the best markets," says Choucri
"I'm not worried about foreign investments. The challenge is how to increase local demand and attract more Egyptian institutional and individual investors. There is no overheating by foreign investors, on the contrary, the market suffers more from a lack of demand than a lack of supply," Choucri added.
Prospects remain encouraging for foreign investment in the Egyptian capital market. A new surveillance system on market trading will begin this year, to coincide with the launch of new trading systems. A new general law for the capital market will also be issued this year -- a more comprehensive version of the law currently in place.
The privatisation programme, which the government has prioritised, will also continue apace, all of which should add up to an improvement in capital flows.
Choucri is also optimistic: "The valuation of stocks remains modest, and does not reflect their corporate performance. There is a great opportunity for dividend yield growth at levels that could attract much more foreign investment."
Which is all to the good given the Egyptian economy needs large amounts of foreign investments, both direct and portfolio, to plug the gap between its modest investment rate (about 20 per cent of GDP) and a target growth rate of seven per cent.
