21 - 27 December 2000
Issue No.513
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Al-Ahram Weekly On-line 21 - 27 December 2000 Issue No.513 |
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To buy or not to buy?
By Sherine Abdel-Razek
Activating the demand side of the Egyptian stock market is the topic of a study prepared by a team of academics commissioned by the Capital Market Authority (CMA). The study categorises the different types of investors and factors affecting their investment decisions. In the process of addressing its primary concern, it also treats the supply side, that is, the available investment instruments.
A key focus of the report is sustaining and increasing domestic investment. Such concern is well-warranted given that domestic investors accounted for 73 per cent of market turnover in 1999. One way to keep investors involved in the stock market is to ensure that it offers a high yield compared to other investment alternatives.
Last year, the return on securities listed on the index of the International Finance Corporation, which is the private arm of the World Bank, came in at a low of 2.7 per cent. Bank deposits, post office savings and investment certificates, in contrast, offered rates of 9.4, 10.5 and 11 per cent respectively.
One of the CMA report's suggestions to counter the attraction of these other investment instruments is lowering interest rates on bank deposits. With the release of this report, this recommendation was made public just a few days after the government's decision to raise the interest rate on treasury bills, a move that was preceded by a 0.5 per cent increase on the yields of National Bank of Egypt investment certificates and post office savings.
Increasing public awareness about investing and the stock exchange is a recommendation that targets individual investors. With an eye on the investment potential of the younger generation, the bourse's board of directors is preparing a programme to introduce investment basics in secondary schools and colleges.
Moving to institutional investors, the report suggests that Egyptian banks have considerable scope for increasing their investment portfolios. The consolidated budget for commercial banks reveals that in the period from 1995-1999, banks' securities investments totaled LE3.5 billion -- a mere 8.5 per cent of their total assets. CMA's report attributes banks' tendency to shy away from investment in available traded securities -- shares and bonds -- to the fact that such investments are long-term ones. As the banks require liquidity, it is risky for them to tie up a large portion of their funds.
The study thus calls for introducing investment instruments such as derivatives and options. The draft for the capital market law, which is scheduled to be introduced into parliament in the new year, is expected to give the green light to such instruments. However, since Ismail Hassan, the governor of the Central Bank of Egypt was quoted last week as saying that banks will not be permitted to deal in derivatives, it remains an open question whether such instruments will be available in Egypt.
The other type of institutional investor treated in the study is the investment fund. Despite the promising performance of these immediately following their establishment, almost all Egyptian investment funds, with one or two exceptions, are suffering mounting losses. A report issued recently by the Ministry of Economy estimated that Egypt's 21 investment funds averaged losses of 10 per cent during the 11-month-period ending 30 November, 2000. The report advocated the establishment of an association for shareholders in investment funds to review their performance.
Pension funds, both public and private, offer another relatively untapped source of capital for the stock market. In 1998, only 0.7 per cent of moneys in public pension funds was invested in the stock market.
Investments by foreigners in the local market were also evaluated in the report. In both 1997-1998 and 1998-1999, movement of capital from foreign portfolios tended towards net outflows. This phenomenon was heightened by the economic crisis in south-east Asian and the liquidity and exchange rate problems in Egypt.
In its assessment of foreign transactions, the study evaluated Egyptian offshore funds -- investment funds established in foreign countries to invest in Egyptian securities. Assessing the increasing number of these funds as a positive sign -- seven have been established since 1996 -- CMA's report recommended that additional ones be set up. These funds are much more prevalent in other emerging markets; China and Brazil, for example, have 108 and 94 respectively.
Moving to the macro level, CMA's report advocated a variety of measures to stimulate the economy in general. Heading these were suggestions for accelerating privatisation. It advocated the transformation of a number of service-providing economic authorities into holding companies with subsidiaries that could be traded on the stock market. The Cairo Airport Authority and EgyptAir were among the nominees in this regard.
To accelerate the financial and administrative restructuring of state-owned companies, the report proposed using the know-how and assets of venture capital companies. Institutionally, it recommended the establishment of non-banking financial institutions, namely, mortgage providers and factoring companies, which are a kind of collection agency. The latter have the potential to provide companies which are in debt with much needed liquidity.
The study has also shed light on some of the problems preventing institutions working in the capital market from achieving their potential. Thus, it recommended raising the capital requirements for licensing brokerage companies and asserted that services provided by brokerage houses should be available throughout Egypt.
Concerning its own administration, it suggested that the Capital Market Authority should have its own budget, separate from that of the state, and that its role be increased in setting regulations related to its financial, administrative and personnel affairs.
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