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From revival to bounce
Published in Al-Ahram Weekly on 18 - 05 - 2006

After years of stagnation, the Egyptian capital market has finally won international recognition. Sherine Abdel-Razek reports
The Egyptian capital market's bullish performance over the past three years has succeeded in competing with the government's ambitious economic reform in making the headlines. The culture of investing in the stock market and following up on it performance has once again been revived. This is a notable development given the fact that the Egyptian bourse had been closed for 40 years following the nationalisation policies implemented in the 1960s. What was once the world's fourth largest stock exchange had remained virtually dormant, until economic reform policies revived it in the early 1990s.
Perhaps the strongest manifestation of the Egyptian stock market's new-found vitality is that some one million individual investors known as retailers, tapped the market for the first time in 2005. This was the result of an unprecedented growth in company revenues which sometimes reached the three digit threshold.
The Cairo and Alexandria Stock Exchanges now dominate the top ranks of fast-growing emerging market categories, and are constantly monitored by major financial powerhouses like Morgan Stanley and Standard & Poors. The Egyptian stock market showed its strongest performance last year when it recorded a growth of 150 per cent. It outpaced most of its peers in other emerging markets, ranking as the best- performing stock market worldwide for the second consecutive year, according to a Financial Times assessment.
Market capitalisation shot up from LE175.97 million in January 2004 to LE532 billion in January 2006. While this surge has retreated over the past three months in a correction movement, the LE455 billion threshold attained by the market last week is still 200 per cent higher than that of three years ago. Stringent new listing rules have also reduced the number of companies listed, simultaneous with a significant improvement in the quality and performance of companies. The value of transactions rose from a threshold of LE100-200 million daily in the past three years, to over LE500 million and, at times, LE1- 2 billion. This part was given momentum after a same-day trading technique was adopted at the end of last year.
CASE has subsequently started to gain international recognition which is reflected in a heightened interest by foreign investors. Foreign transactions now stand at an approximate 30-35 per cent of market turnover every month. The Egyptian stock market has been included in international portfolios, in collaboration with global financial institutions like DOW Jones, ABN AMRO and Deutche Bank.
The DOW Jones CASE Titans 20 index was also launched four weeks ago to track the performance of the market's 20 best-faring companies. This is according to criteria set by Dow Jones, the world's largest index provider. Companies' performance is judged according to price, financial performance and growth rates. Foreign individual investors interested in buying in CASE's 30 most active stocks can do so at a minimal investment, by putting their money into open-ended investment certificates. These are currently traded for as low as $10 per certificate. The open-ended certificates were launched by ABN Amro in November of 2005 and Deutche Bank last March. They are currently traded on the Frankfurt and Stuttgart stock exchanges.
The growing international acknowledgement of the Egyptian stock market has been the result of strong economic fundamentals that have supported its performance. A package of far- reaching reforms implemented by the government over the past three years has also further consolidated the stock exchange. This has included a better monetary system based on a free exchange rate, coupled with the other reforms adopted with the accession of the cabinet of Prime Minister Ahmed Nazif in the middle of 2004.
The cabinet which includes several technocrats and businessmen supporting economic liberalisation has introduced broad reforms in the customs tariffs and income tax regimes. Substantial reductions were undertaken in both, which resulted in an improvement in the performance of companies and an increase in listed securities' revenues. The acceleration of the long-standing but sluggish privatisation programme has also provided the market with stocks from appealing sectors such as oil and telecommunications. This has strengthened the market even more by diversifying its traded sectors. A banking overhaul has also consolidated the position of Egypt's financial institutions and attracted a substantial foreign interest in the market in the past two years. Société Générale Bank of France has expanded its presence in the Egyptian market by further raising its stake in NSGB. Other prominent newcomers to the banking sector are the Greek Piraeus, and Calyon Bank of France.
The Qualified Industrial Zones (QIZ) agreement between Egypt, Israel and the US has energised the textile sector, with companies like Arab Ginning making it into the top-traded list for the first time.
Last summer's appointment of the reform- minded Maged Sahwqi and Hani Sarieddin as CASE and Capital Market Authority heads respectively is seen by many as having given a significant asset in the stock market's administration. Both men have set their efforts to re-shaping the bourse to become one the region's most prominent stock exchanges. This is currently realised through further structural changes, regulatory reforms and liberalisation. All of these developments have contributed to softening the impact of the market's current reversal that started early last February. Observers seem placid about the current downward trend, regarding it as a correction movement that is normal in the stock market cycle. They predict that the current reversal will soon end, with the market already showing signs of strong performance. Analysts say that following the overheated performance which extended from November 2005 to January 2006, the market needed a cooling-down period in which investors could cash in their profits. The stock market drop was induced by the setback that had afflicted the Arab region's bourses last March. A sizeable number of Arab investors pulled out of the Egyptian stock market in order to compensate for losses sustained in Saudi Arabian and UAE markets.
Other future developments are expected to further bolster the market and boost its resilience to shocks. These include the introduction of new instruments like derivatives and bond-backed securities. The securitisation law's executive regulations have already been issued to pave the way for such a step.
New investment techniques like short-selling and Internet trading are also expected to open up new channels for security investments.


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