10 - 16 August 2000
Issue No. 494
|Published in Cairo by AL-AHRAM established in 1875|
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Not a panaceaBy Sherine Abdel-Razek
After much anticipation, the US investment house Morgan Stanley Capital International (MSCI) last week announced that in May 2001 it would include Egypt in its Emerging Free Markets Index (EMI). The index is used by fund managers worldwide to measure stock performance in emerging markets and allocate assets accordingly.
Egypt's inclusion in the index is expected to make stock in Egyptian companies more attractive to managers of international portfolios in proportion to its weighting in the EMI. The importance of this index is attested to by a recent survey conducted by the US investment bank Merrill Lynch which revealed that 90 per cent of investments by international investment institutions are linked to MSCI indices.
Given that the inclusion of a country in the EMI is considered a signal that its economy has positive prospects, Morgan Stanley's announcement might have been viewed as a cause for joy. This is especially the case since the announcement came during a period of gloom in the Egyptian market due to the limited liquidity and negative assessments of the economy by international rating agencies. Confounding predictions, the market rallied from its recent slump for one day only. Although prices increased for actively traded shares and for the stocks of companies with low capitalisation, in the subsequent three days, the bourse reverted to its downward trend.
Even the market's main movers, who will definitely be included in the index, namely, MobiNil, the Commercial International Bank, and Orascom Construction Industries saw their stock drop a full 5 per cent during those three days. This is, in fact, the full extent to which stocks may fluctuate under the regulations of the Cairo Bourse.
Downplaying MSCI's announcement and the subsequent trend in the market, experts say that Egypt's inclusion in the EMI is not a "novel development," adding that they had anticipated the recent drop in the value of stocks.
According to Adham El-Fayoumi, senior research analyst at ABN AMRO Delta, speculation that Egypt would be included in the EMI began following Morgan Stanley's decision in 1997 to upgrade Greece from the emerging markets category to that of developed markets. At that time Egypt and Morocco were suggested as potential candidates for the EMI. Since then MSCI has been analysing the Egyptian market.
When an investment bank considers including a capital market in its global indices, it normally measures performance of this market through a "stand alone index" comprised of companies representing different sectors. When the decision is made to add a given market to an index for countries sharing its rating, its stand alone index is incorporated into one comprised of numerous similarly classified markets.
The MSCI Egypt index comprises 18 of the country's most actively traded companies which account for over 60 per cent of the capital traded on the Egyptian market.
One of the reasons cited for the tepid reaction in the market to MSCI's announcement is that the date for Egypt's inclusion -- set for next May -- is still a long way off, suggested Alaa El-Seesi, head of research at HC (Hussein Choukry Securities), a local investment house that is 27 per cent owned by Morgan Stanley. Even when Egypt does become a part of the EMI, and because its weighting in the index will not exceed one per cent, it is predicted that its inclusion will have only a slight impact on the index.
Moreover, most fund mangers interested in the Egyptian market have already invested in it, according to El-Seesi. "All that will happen is that they will increase Egypt's share in their portfolios to reach the one per cent level," he said. For international investors attracted to Egyptian stocks, Egypt is already included in the International Finance Corporation's Global Composite Index, in which it has a weight of 0.7 per cent.
The subdued response to Egypt's joining the EMI might also be attributed to the fact that the market is burdened with a number of problems that have pushed it downwards, says El-Seesi. In the absence of any inspiring economic or corporate news, alongside negative assessments of the economy by international ratings agencies during the past few weeks, these problems have appeared more acute.
Will Egypt's inclusion in the MSCI eventually have a positive impact on the market?
El-Fayoumi is optimistic that the market will begin to reap benefits from Egypt's inclusion as early as September. His reasoning is based on plans to float new stock for strong enterprises such as the electricity authority. He also suggested that trading will be significantly boosted by increased international exposure of companies comprising the index.
Some changes to the list of companies included in the index are expected later this month when Morgan Stanley reviews the market to determine if any companies should be added to the index and if any should be removed.
Neither Media Production City (MPC) nor Orascom Telecom (OT) is included in the index, even though they are two of the most actively traded companies and are among those with the highest market capitalisation.
"We still do not know what the criteria are for adding or removing companies," said El-Seesi. And while observers suggest that there is a good chance that OT will be included, this might not be the case for MPC if transparency criteria are used.
MPC is the second largest company in terms of market capitalisation and it accounts for a large portion of the market's overall turnover. However, it has been criticised sharply due to the dearth of information made public about its finances.
A press release issued by MSCI said that there are significant barriers in Egypt to investment by foreign institutions. The release also mentioned the foreign currency shortage.
News of MSCI's inclusion of Egypt came hours before the latter's economic outlook was downgraded from neutral to negative by Thomson Bank Watch -- an assessment that came in the wake of a similar negative rating by Standard and Poor's two weeks ago.
"We should consider the inclusion as an incentive pushing us to deal with the market's problems," said El-Seesi "but it is not a panacea for those problems."