A year in the market

By Sherine Abdel Razek
The year 2000 got off to a strong start with a bullish sentiment prevailing over capital market transactions. Based on the ambitious economic plans announced by the cabinet, which had been formed in October 1999, the initial optimism, however, proved to be short-lived.
During the first quarter of 2000, government-owned Al-Ahram Cement entered the bidding process for the sale of a majority stake in the public-sector Ameriyah Cement Company. This move indicated that the new cabinet -- unexpectedly backtracking on earlier promises -- was determined to limit foreign ownership of privatised companies, thus sending the "wrong signals" to foreign investors.
But this was only the beginning of the market's woes. It soon became mired in a severe domestic liquidity crunch. This was reflected in the low volume of transactions throughout the year and lower than expected financial results by listed companies.
The government tried to resuscitate the market by paying its arrears, unveiling a 10-month plan by which it would make good on LE25 billion of its debts. However, the impact of this plan was outweighed by a series of negative reports on the Egyptian economy beginning with the British financial house Robert Flemings.
In March, Flemings issued a pessimistic report criticising the government's exchange rate policy. The Egyptian financial community responded, charging that the report was highly subjective. Following the outcry, Prime Minister Atef Ebeid received an apology from Flemings.
But the feelings of victory dissipated quickly when two rating agencies, Thompson Financial Bank Watch and Standard & Poor's, downgraded their outlook for the Egyptian economy. The ratings institutions attributed their decisions to factors similar to those cited by Flemings: the decline in the pace of privatisation and unstable exchange rates topped their lists. More criticism followed towards the end of the year when in mid-December, Moody's issued a negative outlook for the seven Egyptian banks whose performance it tracks, singling out their credit practices for particular criticism.
In a move aimed at bracing itself against such negative publicity, the Egyptian government in November appointed Morgan Stanley Dean Witter to advise it on its relations with international rating agencies. Such a move was well-advised as the government is preparing for its first sovereign bond issue in European markets, scheduled for early 2001.
On the privatisation front, the failure to translate into concrete achievements the plan to accelerate the sale of public sector companies also weighed down the market. Particularly disappointing was the case of Telecom Egypt which was slated to have 20 per cent of its equity floated in early November. Its initial public offering (IPO) was postponed out of concern that market conditions and the global downward trend in IT stocks would negatively affect its prospects.
The government had also put on hold plans to privatise five department store companies, including Omar Effendi, after the bids submitted by a consortium of local investors came in lower than the assessments of the companies' value.
Construction and cement stocks suffered a direct blow during the spring when the introduction of the mortgage law was shelved just a few days after some senior officials asserted that it would be passed in the parliamentary session ending in May.
All of these developments were reflected in the market's performance. The Capital Market Authority index wrapped up the year at 622 points, having shed 7.5 per cent of its value compared to its level at the end of 1999.
Market capitalisation plummeted from LE138 billion in January to settle at LE121 billion at the end of November. The average monthly value of transactions during the year hovered at approximately LE3.5 billion, with the second half of the year registering the poorest monthly averages.
Faced with such circumstances, investors put their money into the big caps and companies with high levels of liquidity whose stocks were easy to unload when the going got rough. Investors' focus on these companies helped them maintain their positions on the list of most actively traded stocks. Led by the Egyptian Mobile Phone Services Company (MobiNil), the list was filled out by Orascom Telecom, Media Production City and Orascom Construction Industries.
MobiNil draws its strength from a variety of sources. With a base of one million subscribers, it retained the distinction of being Egypt's only mobile operator listed on the bourse. The other GSM operator, Click, has not set a date for jumping into the fray. Nevertheless, even MobiNil saw its value plummet dramatically over the year, winding up December at LE75.3 per share, compared to its peak value of LE187 which it attained at the beginning of 2000.
With the start of the new year, MobiNil made news once more. France Telecom announced this Tuesday that it is buying a further 25.15 per cent stake in MobiNil for Telecommunications, which it will acquire from Motorola Inc. for $252 million. This raises France Telecom's stake in the company to 71.25 per cent.
And while most analysts remain bullish on MobiNil stock, recommending it as a buy, there is a general consensus that it derives much of its dynamism from the outstanding performance of the information technology (IT) regional star, Orascom Telecom (OT), which owns 27 per cent of MobiNil.
OT acquired an 80 per cent stake in the African mobile network operator Telecel International in a deal valued at $413 million. With this venture, OT secured mobile licences in 11 African countries. This number rose to 12 by the end of the year after OT won a licence to operate in Niger.
This summer, OT floated LE320 million-worth of its equity on both local and global markets. Egypt's biggest IPO, OT's offering comprised 20 million shares and GDRs and was two times oversubscribed. Foreign financial institutions have already cornered 70 per cent of the offering.
But this was not all for OT and MobiNil. During November and early December, thanks to rumours of a merger of OT with an international IT company, it along with MobiNil managed to rally and buck the downward trend impacting on the bourse. According to market speculation, France Telecom is currently in competition with the Spanish telecommunication company Telefonica to acquire an as yet undetermined stake in OT. OT shares ended the year at LE51.9.
Another popular stock was that of the enigmatic Media Production City (MPC). The capital increase in MPC closed in early February twice oversubscribed, with capital reaching LE1.45 billion, distributed amongst 145 million shares. Despite the consensus by market analysts that the shares were overvalued, MPC continued attracting investors throughout the first quarter of the year, ending March at LE72 per share.
Midway through the year, the lustre seemed to be wearing off MPC due to worries over a lack of transparency concerning its operations and speculation that some of its biggest shareholders were manipulating stock at the expense of small investors. These factors weighed down its price during the third quarter of the year.
However, MPC began to creep back into the limelight after it announced its results for the nine-month period ending in September. The company realised net profits of LE37.8 million, compared to LE17.16 million in the corresponding period of the previous year.
Early autumn also witnessed the General Authority for Free Zones and Investment's (GAFI) announcement of three new projects to the tune of $36 million.
The Holding Company for Financial Investments (the Lakah Group) was another company grabbing a share of publicity during the year. It sold its steel-making affiliate in a move aimed at streamlining the company to focus on its core businesses for the sale of medical supplies. This move was followed by its announcement that it had achieved an 82 per cent increase in sales during the first quarter compared to those during the same period in 1999. Shares for the Lakah Group reached LE8 in April.
This revival proved short-lived as the gains evaporated following rumours that the group's founder, Rami Lakah, had fled the country leaving behind LE1.3 billion in bank debts. The group later managed to capitalise on its founder's election to parliament amidst news that he had reached an agreement to settle with his creditors.
Among the positive nods received by the Egyptian market as a whole this year was the announcement that it would be included in Morgan Stanley's emerging market index. Morgan Stanley produces indices widely used by fund managers. However, this news did not have the expected positive effect on the market, perhaps due to the fact that the inclusion will take place only next May.
Another positive development was the decision by Flemings and other financial houses to establish a presence in Egypt. Flemings' decision, coming only three weeks after its negative report on the Egyptian economy, took observers by surprise.
Flemings and the Commercial International Investment Company announced that they would join forces with the Commercial International Bank in asset management activities. This merger created Egypt's biggest asset management group.
The Dutch bank ABN Amro was another institution that opened up shop in Cairo. The British bank HSBC (Hong Kong Shanghai Banking Corporation) strengthened its position in Egypt by increasing its stake in the Egyptian British Bank from 40 to 90 per cent. But this was not the only way it increased its presence: it also acquired Credit Commercial de France, thereby obtaining a controlling stake in Credit International d'Egypte. All of this action precipitated rumours of a merger or alliance between both banks under HSBC management.
Relates stories:
In need of a jolt 21 - 27 December 2000
From bad to worse 14 - 20 December 2000
Related links:
Cairo and Alexandria stock exchanges
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