Managed funds and increased institutional investment are keys to stability CAIRO: Everything looks different in hindsight. Not long ago spectators marveled at the miracle of the Egyptian stock market. During a two year rally, encouraged by the global economic recovery and a new government keen on market liberalism, investors poured their savings into stocks and capitalization rose dramatically. Meanwhile, the government sold its stakes in a number of established companies in 2005, including Telecom Egypt and Alexandria Mineral Oil Company, which attracted a mass of small individual investors in search of quick gains and with a superficial comprehension of stocks. Yasser El-Mallawy, chairman and CEO of EFG-Hermes, cites the entry of a large number of retail investors as one of three key factors that precipitated the numerous corrections in share prices this year. The decline in Gulf markets in recent months, combined with the increase of interest rates by Western authorities in response to inflationary concerns, set the stage for recurred panic selling by Egyptian investors. An increase in interest rates is the number one enemy for stocks, says El-Mallawy at a discussion organized by Egypt s International Economic Forum, explaining that as interest rates rise investors redirect their funds away from the stock market, causing share prices to fall. However, the correlation between the Egyptian and Gulf stock markets may not be as strong as this year s corrections suggest. El-Mallawy believes that as Egyptian companies focus on their core businesses and expand regionally, their profits will improve and share prices will increasingly become less dependent on the Gulf. We believe that there will be a weaker correlation between Egyptian and Gulf markets, says El-Mallawy. Husseign Choucri, chairman and managing director of HC Securities & Investment, adds that the statistical evidence also suggests that there is virtually no significant correlation between the Egyptian and Gulf stock markets. This means that when Gulf markets decline, it does not necessarily imply that the Egyptian stock market will also decline. Their markets declined for reasons that are specific to them and have nothing to do with us, says Choucri. Although several investors from the Gulf entered the Egyptian stock market in recent years, Egyptians still account for the majority of trading activity on the exchange. The proportion of trading of Gulf investors is approximately 15 percent, says Choucri. This alone could not have been the trigger that caused the Egyptian market to decline. I think that a larger factor in the decline of the Egyptian market relates to the Egyptian investor. There are also fundamental differences between the two markets. Stock markets in the Gulf are characterized by a concentrated representation of only a few sectors. The Egyptian stock market, on the other hand, is more diverse and, unlike the Gulf, has many features in common with other emerging markets in general. Egypt belongs to the group of emerging market countries, says Choucri. The correlation between Egypt and India or Egypt and Turkey is stronger than the correlation between Egypt and the Gulf. Nevertheless, the continued dominance of retail investors threatens the stability of the market. Seventy percent of the market is individuals, and 90 percent [of] these are speculators or at least very short-term investors, says Hany Tawfik, chairman of the Arab Private Equity Union. This means that we should revise our outlook and I believe that we should look into what needs to be done to transform this stock market into a stock market of institutions. One way of achieving this is to encourage the participation of asset management companies, enabling individuals to invest in the stock market through funds under the discretionary control of a skilled manager. The fund manager is a professional; when there is a decline in the market he doesn t get anxious and rush to exit, says El-Mallawy. Fluctuations in share prices are inevitable, but the structure of the market has exacerbated volatility of late. By increasing the role of asset managers and institutional investors such as pension funds and improving the competence of brokers, investment decision makers who influence the market will be better informed and less vulnerable to panic selling. This in turn would promote a more stable market and prevent the severe corrections that were witnessed this year from recurring.
