It has been an interesting year for the Egyptian Exchange (EGX). In 2015 the main board featured the highest number of listed companies since 2010, while products such as the nation’s first exchange-traded fund (ETF) provided a deeper market and new investment options. After years of crisis management in the wake of the 2011 revolution, the exchange authorities have re-established an outward-looking stance, adopting an aggressive promotional strategy aimed at attracting new, solid companies, as well as institutional and foreign investors. This is a long-term ambition, and the fluctuations of the main index over the year are a reminder of the extent to which regional and global economic conditions weigh on the domestic exchange. Still, with increased economic stability and a government development strategy more ambitious than anything seen in Egypt for decades, the EGX is becoming an increasingly attractive proposition for investors both at home and abroad.
Surviving Adversity
Despite the political and economic turbulence of recent years, the EGX entered 2015 in a period of sustained growth. In the previous year market capitalisation reached its highest level since 2009, and a 32% gain of the main index made it a star performer in global terms. The exchange also returned to the international spotlight, gaining the post of president of the Federation of Euro-Asian Stock Exchanges to end a two-decade monopoly of the position by Turkey, as well as picking up the Most Innovative Stock Exchange in Africa award for 2014 at a ceremony at the New York Stock Exchange. The EGX has weathered the fallout from Egypt’s political transition well, although given its storied history its recent renaissance is not a surprise.
At the turn of the 19th century trading activity in Egypt was split between the Alexandria Futures Market and a new market in Cairo. A period of rapid growth for the combined Cairo and Alexandria Stock Exchange (CASE) from the late 1920s was followed by the assumption of power by President Gamal Abdel Nasser, with the nation turning away from market economics in the 1950s and 1960s in favour of nationalisations. It was not until promulgation of the Capital Market Law of 1992 that the exchange returned to the level of growth it had enjoyed earlier in the century. By the year 2000 more than 1000 firms had listed on CASE’s main board, a rapid expansion that, although welcomed by the investment community, gave rise to volatility, insider trading and frequent violations of disclosure requirements. Reform was necessary, and over the following years the exchange focused on establishing a smaller number of high-quality listings and sustainable growth of market capitalisation. In 2009 CASE was rebranded as the EGX, and in April 2012 it moved the bulk of its operations to Smart Village, an information technology park west of the capital, while retaining its city centre building. Today, the EGX is one of the premier capital markets in the Middle East and North Africa, and a crucial engine of growth for Egypt’s economy.
Main Market
The EGX is a multi-location platform with floors in both Cairo and Alexandria, which operate on a standard primary (new issue) and secondary (trading) basis. Both locations also share the same trading, clearing and settlement mechanisms that have been operated by the private company Misr for Central Clearing Depository and Registry (MCDR) since the bourse moved from physical stocks in 1996.
As of June 2015, 221 companies were listed on the exchange (compared to 214 the previous year), with a combined market capitalisation of LE485bn ($66bn). Among these are firms with multinational footprints that have assisted the EGX in attracting capital from the GCC and beyond, with the most actively traded stocks as of the first half of 2015 being Orascom Telecom Media and Technology Holding, Amer Group Holding, Citadel Capital, Global Telecom Holding and Palm Hills Development Company.
Egypt has a broader economic base than many of its hydrocarbons-driven regional peers, and this is reflected in the distribution of capital across the EGX’s listings sectors. The largest of these is construction and materials, companies listed within which accounted for 20% of total market capitalisation at the close of 2014, followed by banks (17%), telecoms (13%), real estate (10%) and financial services excluding banks (8%). Other significant sectors include industrial goods, services and automobiles (5%), travel and leisure (5%), and chemicals (5%). The smaller sectors making up the rest of the market are basic resources, food and beverage, health care and pharmaceuticals, oil and gas, personal and household products, retail, media, technology and utilities.
Nilex
While the EGX’s main board continues to account for the vast majority of market activity by trading value, since 2010 investors have had the option to direct their capital to a range of small and mid-cap firms that are listed on a separate board, the Nilex. Like other secondary markets in the region, this sub-market shares the same basic trading rules and principles as the main market, but attempts to attract businesses to its board through less onerous listing requirements that are better suited to the profiles of small and medium-sized enterprises (SMEs).
For example, companies listing on the Nilex are only required to produce financial statements for one fiscal year before the listing request and do not have to exceed a minimum net profit level. Nilex listings also have lighter disclosure rules regarding their quarterly and semi-annual financials, which do not need to be submitted to the regulator and the exchange for approval before submission. Fees have also been reduced in a bid to attract more listings: as of 2015 annual listing fees levied on SMEs stood at 0.5 per thousand of the capital, with a minimum of LE500 ($68) and a maximum of LE30,000 ($4100). Establishing a small and mid-cap board in an emerging market is a challenge, yet the efforts of the EGX authorities to promote interest in the Nilex have met with considerable success. At the beginning of 2015 the number of listed companies on the Nilex had reached 33, with nine new firms coming to the board in 2014 alone.
Tracking
With momentum gathering on the Nilex, in 2014 the EGX introduced a new index for its small and mid-cap board. The launch of the Nile Index is part of the authorities’ continuing effort to increase market tracking capacity that has resulted in a range of indices being made available to investors. The market’s primary index is the EGX 30, which since 2009 has been formulated both in Egyptian pounds and US dollars to facilitate comparison with other markets. The same year saw the creation of the EGX 70, which tracks the most active stocks outside the EXG 30 in terms of market capitalisation and liquidity. Other indices include the EGX 100, the EGX 20 Capped (in which the weighting of any single company is capped at 10%), the S&P/EGX ESG Index (a partnership with Standard & Poor’s that tracks firms showing commitment to environmental best practice and corporate governance) and the Dow Jones EGX Egypt Titans 20 Index (a partnership with Dow Jones which tracks the leading 20 stocks ranked by free-float market capitalisation, sales/revenue and net income).
Debt Market
The EGX is primarily an equities market and, although the technical infrastructure for both a primary and secondary debt market is in place, the bulk of debt market activity is confined to treasury bonds issued through the primary dealers system (PDS). The PDS is linked electronically to all primary dealers (comprising 15 banks), as well as custodians and MCDR, and follows an internationally standard pricing system using the clean price.
During 2014, LE67.2bn ($9.2bn) worth of government bonds were trading on the EGX, compared to just LE43.5m ($5.9m) of corporate offerings, which reflects the dominance of public issuances in the debt arena. Since the revolution of 2011 this has been exacerbated by the government’s inability to secure funding from international markets, which has compelled it to rely on domestic debt issuances to meet its fiscal commitments. Egypt’s banking system, therefore, has purchased treasury issuances and government bonds in large volumes over recent years. Although representing a useful source of yield for the nation’s financial institutions, this has led to some concern that government debt is crowding out lending to the private sector. However, while the trend of elevated domestic debt issuance remains, there have been recent improvements in the rate of corporate activity. The LE43.5m ($5.9m) of corporate bonds traded on the EGX in 2014 compared favourably to the LE19m ($2.6m) of the previous year. Similarly, the trading volume for corporate issuances reached 303,000 transactions, versus 184,000 in 2013.
International Return
Perhaps the most interesting development in the debt arena in 2015 is the government’s preparations to return to international markets. The stabilisation of the economy and the government’s efforts to reassure the global investment community have helped set the stage for Egypt’s first international government debt issuance since 2010. In March 2015, reacting to the possibility of lower rates as a result of the upgrade, the government announced it had hired seven banks to help it sell $1.5bn worth of bonds. In April Moody’s followed Standard & Poor’s and Fitch in raising the nation’s credit rating, following five downgrades since 2011.
Performance
As a forum for capital raising and investment, the EGX has proved itself robust in the face of challenging political and economic circumstances. The revolution of 2011 saw the temporary closure of the exchange and a significant fall in the main index when it reopened, but since 2012 it has shown a sustained recovery. The EGX 30 climbed by 51% in that year and followed this rebound with a further rise of 24% in 2013. In 2014 the trend continued. The EGX 30 realised a 32% gain for the year, representing 100% growth over the previous three years and cementing the exchange’s position as a key component of the Egyptian economy. Capital increases by listed companies surged over the year to LE9.3bn ($1.27bn), the highest level seen since 2011 and an 86% increase over the previous year.
According to EGX data, the nation’s bourse has provided total funding of more than LE100bn ($13.6bn) over the past decade. To put this performance in perspective, Egypt’s main index grew more rapidly than any other Arab country in 2014, while in global terms, along with India, it topped the MSCI Emerging Markets Investable Market Index in 2014, with both countries gaining 25% and beating competition from the Philippines, Indonesia and Qatar. In terms of sectors, health care and pharmaceuticals showed the highest increase for the year, climbing 74%, followed by real estate (61%), personal and household products (58%), and financial services excluding banks (44%). These gains outweighed the declines seen in just five of the exchange’s 17 sector indices over 2014: travel and leisure, which fell by 2%, telecoms (3%), chemicals (9%), basic resources (10%), and food and beverage (11%).
The Nilex posted a similarly strong performance over 2014. Trading value rose year-on-year from LE748m ($102m) to LE784m ($107m), to solidify the gains made in the previous year. Trading volume, meanwhile, rose from 254m securities in 2013 to 263m in 2014. Given the number of companies listed on the market, these figures represent a high liquidity level and a vigorous trading environment, which saw the Nilex achieve a turnover ratio of 72% for the period, compared to the 38% shown by the main market. Much of this expansion can be attributed to a decision to increase the trading hours on the secondary board to match the main board, as well as the efforts of the EGX’s management to promote its new market both domestically and internationally.
Regulation
Since 2009 the non-banking financial services sector has been regulated by the Egyptian Financial Services Authority (EFSA), which has assumed the duties of the now defunct Capital Markets Authority. Since its inception, the EFSA has continued to oversee the process of market reform instigated by its predecessor, most notably in cooperating with the exchange on issues of corporate governance, disclosure and transparency. The most visible effects of this have been the reduction in the number of listed companies on the exchange from 803 in 2004 to 221 in 2015, and a rise in the market’s value over the same period from LE173bn ($23.6bn) to LE485bn ($66.1bn) – a trend that illustrates the regulator’s emphasis on quality over quantity. The outbreak of political unrest in 2011 diverted the EFSA’s attention from long-term reform to short-term challenges. Much of its work in 2011 was directed to safeguarding the exchange. By mid-2012 the regulator judged the political and economic scenario stabilised for it to allow the EGX to return its attention to the long-term development of the exchange.
While the EFSA provides crucial oversight to the functioning of the capital markets, the EGX is the more proactive body in terms of generating new regulations and marketing the exchange as an investment platform. Recently, the exchange authorities sought to attract more companies to the main board through the creation of new listing rules, which came into effect on February 1, 2014.
The new regime incentivises initial public offering (IPO) activity by providing greater regulatory clarity, addressing issues such as minimum capital requirements, minimum number of shareholders, percentage free float requirement and minimum number of shares to be listed. They also allow Egyptian companies incorporated directly through an IPO to be listed – an issue that was not addressed in previous iterations – and permit foreign ETFs to be listed for the first time. The adoption of the new rules, combined with the EGX’s promotional efforts and the improving macroeconomic situation, has helped bring about a return of IPO activity (see analysis).
Investor Profile
While new listings remain a priority for the EGX, just as important is the investor base. One result of the political turbulence in 2011 was a reduced appetite for Egyptian securities on the part of foreign and institutional investors. In 2012 the number of new investors registering on the exchange fell to 22,000, compared to 36,000 in 2011, while the number of newly coded institutions over the same period remained almost the same, at 1458. While the EGX succeeded in attracting 16,000 new investors in 2013, this was short of the previous year’s total. With foreign and institutional investors displaying muted interest in the exchange, market activity was becoming dominated by the retail segment – an unwelcome characteristic in emerging markets due to the volatility that arises from it. Widening the investor base has become a key objective of the exchange authorities, and one in which they have begun to meet with success thanks to intensive promotional efforts.
In 2014 the EGX registered more than 21,000 new investors, a 33% increase over 2014. While individuals still dominated exchange activity for the year, accounting for 71% of value traded, institutions showed renewed interest in the EGX as an investment destination, ending 2014 as net buyers and recording inflows three times the size of those seen in 2013. The activities of foreign investors also suggest restored confidence – in 2014 they accounted for 21% of the total value traded and ended the year as net buyers for the first time since 2011. “International investors are increasingly interested in the Egyptian market, particularly private equity investors. Consumables, pharmaceuticals, food and restaurants are the most popular sectors at the moment,” Mohamed Younes, chairman of Concord International Investments, told OBG. The UK – Egypt’s largest foreign investment partner – accounted for 22% of foreign investment on the EGX. Next was Saudi Arabia, which has strengthened its ties with Egypt in recent years and accounts for 20% of the total. Third, in terms of international interest, is the US, which accounted for 15%.
Outlook
This drive towards greater probity will continue as the EGX seeks to reassert itself as a leading regional investment arena. According to the EGX Strategic Plan 2013-17, the authorities aim to reinforce the exchange’s position regionally and internationally through continuous development of the legislation and regulatory structure to ensure investor protection, the introduction of new technologies and continued investment in human infrastructure and corporate governance.
The higher visibility of the exchange is likely to continue, as utilising regional and foreign relations and international promotional campaigns also form part of its strategy. While the ability of the EGX to attract new listings and investors is tied to Egypt’s macroeconomic performance and global politics, the exchange is well positioned to grow: it is the only exchange licensed to practice securities trading in the most populous Arab country, it boasts a wide variety of sectors that reflect the diversity of Egypt’s economy, and it possesses high-quality market infrastructure. Much depends on the government to continue economic reform while maintaining political stability.
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