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the bourse identity
the unprecedented growth of the egyptian stock market
has attracted new investors from previously untapped segments of
society. business monthly reveals how their participation is moving
the market.
by rehab el-bakry
everyone knew the stock market was doing well. the indices were
soaring, the speculators were raking in cash, and back-to-back ipos
were whipping the newbies into a frenzy. yet 29-year-old mohamed
yassin was hesitant. he'd watched as one by one his friends sunk
their cash into the booming market and saw quick profits. but fearful
that the stocks he would choose would fizzle or the market would
collapse, he held onto his savings. "i knew that if i made
the right decisions, i stood to make a lot of money, but i also
knew that i could lose everything with one bad decision," he
says.
yet after eight months of careful contemplation while studying the
idiosyncrasies of the egyptian market, he decided to give it a try.
in september 2005, yassin collected his savings and visited a broker,
investing a "decent sum" in the highly anticipated initial
public offering (ipo) of alexandria mineral oils company (amoc).
and surely he was not alone. the reinvigorated stock market, piggybacking
on the successful ipos of sidi krir petrochemicals company (sidpec),
amoc, raya holding and telecom egypt (te), attracted 1.5 million
new egyptian investors in 2005 - an unprecedented growth in interest.
not surprisingly either. the cairo & alexandria stock exchanges
(case) has never looked so good - its case 30 index, a benchmark
of the top 30 listed companies in terms of liquidity and activity,
growing an average of 140 percent per year since 2004 - making it
one of the fast-growing markets in the world. in early 2004, the
number of daily transactions on the case ranged from 6,000 and 7,000
transactions worth between £e 50 and £e 60 million.
today, it's reporting around 50,000 transactions daily worth an
estimated £e 1 billion - a whopping 200-fold increase in value.
a tool of the people
the bourse's meteoric rise has been fueled by a new breed of investor
who no longer see stocks as the exclusive investment tool of the
rich, but rather as a tool for the masses to tap into quick profits.
suddenly, every housewife, civil servant and cab driver - people
who have traditionally been on the sidelines of the capital market
- is following the action. or a part of it.
"the profile of the people who have opted to put their money
on the case is very much an untold success story for the economy,"
states mohamed kotb, head of trading at prime asset management.
"the type of people who have become interested in the capital
market over the past 18 to 24 months is very different from those
who were traditionally associated with the stock exchange since
its reestablishment in 1992. they are no longer just businessmen
with a few hundred thousand pounds to spare. the profiles have diversified
to include people from humble socioeconomic backgrounds with a lot
less money and yet more than happy to line up for hours to invest
in the capital market."
kotb, who has been working in the capital market since 1997, says
in the 1990s people were intrigued by the stock exchange, but remained
cautious. "the curiosity was there, but only a handful of people
were willing to follow it and actually invest on the case. nothing
compares to the number of investors that have flocked to the market
over the past 18 months."
among these is iqbal essa, a 43-year-old clerk at the passport office
in cairo's mogamma building. last august, when the government announced
that public sector employees would receive a 20-percent "cost-of-living"
salary increase, she and her female colleagues at the passport office
decided to join the market movement. without telling their husbands,
they consulted a broker and invested the bonus in equities.
"everyone kept talking about something called an initial public
offering, and that people were subscribing to it, and that people
were borrowing the identification cards of other people to subscribe,"
she recalls. "we thought this must be something very good and
we did the same as everyone else."
scanning the local newspapers, essa and her colleagues found news
of the upcoming amoc ipo. they called their broker and requested
him to subscribe. when the ipo was launched on september 13, 2005,
its share price shot up 65 percent within its first week of trading.
but rather than cash out, the group decided to stay in the game.
they put the extra 20-percent salary they received each month in
stocks. since then, essa and her colleagues meet regularly to plan
their investment strategy, agreeing on which stocks to buy or sell
then taking action individually, but always in unison.
the good, the bad and the ugly
mustafa el gozamy, a 32-year-old telecommunications professional,
has been in the game for 12 years, having turned a casual pastime
into a money-making endeavor. in 1994, while working on his mba,
he began toying with an online stock market simulation game. "i
used the game as a way to gauge how well i understood how the stock
exchange worked," he recalls. "i found that if i'd actually
made these decisions while really investing on the case rather than
in a game, i would have made quite a bit of money. so i decided
why not try it for real."
and so he did. at the time, only a handful of individual investors
were in the market, which was almost exclusively the milieu of fat
cat businessmen and institutional investors. in the early years
following its reestablishment in 1992 following a 40-year interlude
of socialist-dominated policy, the case remained an enigmatic institution
- a restricted club characterized by opaque regulations and shady
trading. "when i first entered the market, my profile, as an
investor, wasn't that common. people always associated the stock
market with being rich and at the time that was very true,"
he says.
it's been a rollercoaster ride ever since. the economic reforms
and privatizations of the mid-1990s piqued investor interest, but
by the time they responded, the economy had fizzled out and recession
set in. "the market was riding high even though stock prices
were not reflective of how well the listed companies were actually
doing. that was until 1997, when everything changed," says
nabil moussa, executive director of asset management at hc securities
& investment.
the case came to a crashing halt following the 1997 terrorist attacks
in luxor and the asian market crisis. "foreign investors began
to pull their investments from all emerging markets [including]
egypt. this caused local investors to panic and sell off their stocks.
within a matter of weeks, the market crashed. we would all have
to start from scratch," he says.
any glimmer of optimism during the recession that followed was quashed
in 2001, following the 9/11 terrorist attack and the ensuing worldwide
economic slowdown. "at the time, people withdrew their money
from the stock exchange even though there were certain stocks that
continued to perform well," says el gozamy. "personally,
i didn't because i've always believed that i'm in this for the long
haul. i couldn't panic every time a stock dropped because market
rules dictate that the prices will rise again."
it was a trying time for everyone. "after 9/11, a lot of the
international corporate investors pulled out of the market,"
says mohamed radwan, equity manager at delta securities egypt. "brokerages
and traders left the market because there simply wasn't enough business.
some of the biggest players in the market laid off employees, while
others required that their employees accept pay cuts."
as western investors cashed out, arab investors filled the vacuum.
radwan explains that many arabs felt unwelcome in western capital
markets after 9/11 and sought new regional markets for their investments.
"egypt received more than its fair share of these investments,"
he says, adding that the fresh influx of arab capital infused fresh
life into the case, setting it on an upward drive, the economy in
tow.
the most observant investors are the ones who entered the market
at this point, argues kotb. "the prices of some the market's
best-performing stocks were low and banks were giving very little
interest, so it really wasn't worth your while to put your money
in the bank and the market had hit such a low point that the only
place for it to go was up. people who put a meager sum of money
on the case at this point could have easily quadrupled their investments
by now."
it would be fair to say that khaled montasser was among them. the
32-year-old route supervisor at a local distribution company admits
that when he first invested in the stock market, he wasn't even
sure exactly how it worked. in fact, no one in his family had ever
even owned a bank account, let alone a stock portfolio. "i
come from a very simple family," he says. "my father worked
as a security guard in a zamalek building just to put me through
school."
following a promotion and raise in 2003, montasser mustered the
courage to try his luck in stocks. "i used the extra money
as well as my savings over four years to buy stocks. all in all,
i invested around £e 3,000," he says. with no experience
or understanding of the capital market, he simply asked his boss
to tell him whenever he bought or sold stocks, then followed suit.
and his boss was picking winners. "let's just say, now i have
more money than my father probably saved up his entire life."
el gozamy, who would only say he did "very well" during
this period, has noticed a sea change in the profiles of egyptian
investors. increasingly, investors are younger and more inclined
to take risks, and until very recently, entering the market with
as little as £e 1,000. "today, investors like me represent
a sizeable chunk of those who buy and sell stocks on the case. even
more [unusual] is the fact that investors who fit my profile are
no longer the bottom of the food chain. there are other investors
whose income and investment power is a lot more limited than my
own," he says.
economy's mirror
"the stock market is often seen as a mirror of the economy,"
asserts radwan. "when the economy performs well, the stock
market performs well." he explains that as market performance
improves it attracts new investors, who in turn bring more investors.
this inevitably fuels the performance of stocks of listed companies,
causing the market to grow. "it's a cycle," he says.
moussa agrees, pointing out that while the case's cycle began its
upturn in early 2004, the appointment of the reform-minded nazif
government in july 2004 gave it momentum. "the performance
of the case as well as the number of investors grew even further
when the government began to aggressively implement the privatization
program using the case as a tool to partially privatize public sector
companies; and companies, both public and private, began to use
the capital market as a tool to raise capital," he says.
the resulting market growth, in turn, has fueled the public's interest
and attracted previously untapped segments of society. the sheer
number of new entrants into the market and the volume of their transactions
have been sufficient to increase the confidence of both local and
international institutional investors. but they also exemplify a
shift in the way that egyptians invest their money.
according to case chairman maged shawky, young professionals and
middle-class egyptians with full-time jobs and savings are choosing
to invest their savings in stocks rather than put the money in the
bank and wait for it to accrue interest. "[one] reason that
attracts investors, particularly the younger ones in their 20s and
30s, is the risk factor and excitement that goes with investing
in any stock market. they have a much bigger hand in the profit
they make, which is not true if you put your money in the bank,"
he says.
the notion of controlling his own financial destiny certainly appealed
to yassin. the way he saw it, if he put his money in a long-term
bank deposit, he would make around 10-percent annual interest. but
if he invested on the stock exchange, he could make 20 percent or
more if he selected the right stocks. "that's the real challenge
- selecting the right stocks," he says.
a broker's market
brokerage services have not kept up with investor participation
and the increased demand it entails. in 2003, 120 brokerage firms
operated in egypt. despite the significant increase in the number
of investors, the number of brokerages has remained unchanged. demand
has far outstripped supply so brokers can afford to be choosy. and
they often are.
"brokers work on a commission basis," explains hc brokerage's
moussa. "so, if [a broker] has 60 small clients with portfolios
worth less that £e 20,000 each and four clients with bigger
portfolios, these four clients will always receive the better service
because the broker will make more money off them than he will all
the other clients."
while investment legislation prohibits brokerages from refusing
clients, it doesn't prohibit them from setting the criteria by which
clients are accepted. as such, many of the larger investment and
asset management firms have set a minimum portfolio value for new
clients. small investors - those with say £e 500,000 or less
- need not bother approach hc securities. better they gravitate
towards the myriad of smaller brokerages with less stringent requirements.
"people will find this funny, but it's actually very smart
because we are carving a niche for ourselves in the market,"
says moussa. "other clients will simply have to find other
firms. this way, we will ensure that the clients [we accept] receive
the best service while at the same time, the people handling their
portfolios are also making money."
and with over a million new investors last year alone, even the
smallest brokerages have begun setting minimum portfolio values
for new clients.
"we were very lucky," says essa. "we signed up on
the market before the minimum portfolio value was set or else we
wouldn't have managed to meet [our broker's] £e 10,000 minimum
[requirement]."
small investors claim they're getting the short end of the stick.
many accuse brokers of simply collecting clients' money and little
else. clients must often instruct the brokers which stocks to trade
and follow up to ensure the orders were actually placed. "in
theory, your broker should be the one to advise you on good buys
and not such good ones," says yassin. "but here, that's
not the case. investors are the ones who have to read up themselves
on the sectors that are booming at any given moment or companies
that are going to post good results or land a new contract. not
everyone is capable of grasping that, which means that people could
invest in all the wrong stocks and sell at the wrong time."
el gozamy says this has been a problem in the market for some time,
but has become particularly visible now that the market is doing
well. "this has always been the case," he says. "the
reason it's becoming such a big deal right now is because the number
of people affected by it is growing. at the same time, brokers are
under a lot more pressure, especially since most of the people investing
are not that familiar with the criteria by which they should decide
to buy or sell stocks."
a controlling share
yet despite a dearth of service-oriented brokers, egyptians are
generally reluctant to invest in mutual funds - investment companies
that pool the money of individual investors and assign a professional
manager to invest the money in stocks, bonds or other money market
instruments on their behalf.
egyptians, says kotb, prefer to handle their own stock portfolios.
"this way, they feel like they are actually making the profits.
it's a liberating feeling for them... also, egyptians are a little
suspicious by their nature - they're not going to give their money
to a complete stranger to make decisions on their behalf even if
this stranger is better qualified to make investment decisions than
they are."
bingo, says yassin. he believes that only he should determine how
his money is invested - accepting the risk of loss as a tradeoff
for the chance of gain. "with mutual funds, the fund manager
is making the investment decisions on my behalf, just like the bank
made these decisions on my behalf [previously]," says yassin.
"that's not what i want, at least not right now."
el gozamy, on the other hand, rejects the mutual funds option out
of moral conviction. "i am a religious person and therefore
i don't buy the stocks of alcohol producers or banks, for example.
this makes it difficult for me to buy a mutual fund because i will
be too demanding and picky."
maha baligh, head of asset management at efg-hermes, says little
effort has been made to promote and explain mutual funds. "this
is partially because only certain segments of society were interested
in the stock exchange, which is no longer the case today,"
she says. "right now, however, it's just fashionable for people
to invest in the capital market and we do love to follow the herd."
she explains that most of the newcomers to market invested because
they saw their friends or family invest. "they will buy specific
stocks because their friends buy that stock. its's a behavioral
pattern that i doubt will actually change."
for foreign investors, however, it's a different story. moussa notes
that the majority of foreigners investing in the case, who represent
about 40 percent of all investors, manage portfolios through mutual
funds. "those who do buy stocks individually are usually the
type of investors who have a lot of experience in the stock market,"
he says. "many of them are from the gulf region. but westerners
will seldom take the risks on their own."
bubble gazers
the downside of having so many new retail investors, says radwan,
is that it makes the market a lot more volatile. in most markets,
he explains, retail investors account for about 25-30 percent of
the market, while institutional investors account for the remaining
70-75 percent. "in our market, however, the ratio is reversed,
which makes the market unstable because retail investors are the
first to panic."
he says novice investors tend to fall prey to rumors and make rash
decisions. "they could cause the market to crash over a rumor
or cause the price of a stock to rise simply because they are following
the herd even if there is actually no real economic ground for this
increase in the price of the stocks," he says.
yet he's not expecting a crash. "the market still has good
depth with high liquidity and lower valuations than similar stocks
in other capital markets around the region, so i would say that
[we're not in] a bubble and therefore the market is unlikely to
crash." he does, however, think that people who are entering
the market now are coming in too late. "there's still money
to be made, but the market will not grow another 120 percent this
year as it did last year," he says. "you've just missed
the boat."
citing rapid-growth stocks such as orascom telecom (ot), which has
grown 6,000 percent in the last four years, he says capital markets
go in cycles and we're inching towards the end of ours. moreover,
few companies are likely to experience the rapid growth that merited
ot's stock to rise so much. "the joy ride is over."
baligh, however, sees more bulls in the pen. while she anticipates
a readjustment, she nonetheless predicts sustained growth. "the
market is doing well at the moment and i believe that it will continue
to do very well for the next while," she says. "it's been
tested several times over the past couple of years and it might
wobble for a bit but it will pick up the next day or so."
she also refutes suggestions that the market is in a bubble. "a
bubble is when the stocks are too expensive for their fundamental
value, which is not the case in egypt," she says. "we
might see a correction where the prices of stocks are adjusted -
stocks that are too cheap for their value will get a price boost
while those that are too expensive for their value will experience
a price drop. but that's about it. the adjustment will not be severe
enough to cause people to panic, resulting in a mass sale of stocks."
first indications of an adjustment appeared in january, when the
case 30 shed around 13.5 percent within a month - the first significant
downturn in seven months. analysts say this is more a case of profit-taking
than cashing out, and there is little to suggest investors have
left the market. most agree the market still has room to grow.
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