As a bellwether of the domestic economy, the Egyptian Exchange (EGX) has been under particularly close scrutiny since the revolution in 2011. The growth of its main index over 2013 and 2014 was frequently adduced as proof of the improving economic sentiment in the country, and as the government continues with its programme of reform, stock market index movements are likely to remain in the spotlight.
Multiplier Effect
Just as important, although less salient in the national economic discussion, is the level of initial public offering (IPO) activity on the exchange. Not only are new listings a sign of general economic confidence, but as each generates funds usually earmarked for company expansions or new developments, every new company on the bourse has a multiplying economic effect overall.
The EGX acknowledges this in its Proposed Strategy 2013-17, which highlights the importance of a strong primary market in the wider question of the exchange’s role in Egypt’s economic and social development. The stock market, it is argued, represents a vital source of financing that can act as a spur to the national economy – a point that is particularly apposite at a time when Egypt is embarking on a series of grand projects, such as the Suez Canal extension and a new capital city to the east of Cairo, and is looking at a wide array of non-government financing options that would lessen the burden on the public purse. The EGX authorities have therefore made a concerted effort to encourage more companies to stage IPOs.
Increased Activity
In this regard, they have met with considerable success. In 2014 IPO activity returned to the market after a period of muted interest. Five offerings were made over the year, with a total value of LE856m ($117m), and investors were keen to claim a stake in them: according to the EGX all of the IPOs were oversubscribed, with the Arabian Cement Company flotation attracting 18 times the issue size and Golden Coast 27 times oversubscribed. Non-IPO listings on the exchange brought the total number of new listings to 13 for the year, with a total value of LE1.9bn ($259m). This compared favourably to the previous year’s nine new listings, worth LE197m ($26.9m). Almost as importantly, firms already on the EGX also showed a renewed interest in using the exchange for expansionary purposes. By the close of 2014 the number of companies that had already increased their capital or attained approval for a capital increase had reached 72, the highest level since the global financial crisis of 2008. To put this figure in perspective, around 30% of the nation’s listed companies were in expansionary mode by the close of 2014.
The buoyant mood, in IPO terms, has lasted into 2015. The first half of the year was a quiet one for regional offerings due to declining oil prices in the second half of 2014, with the amount of capital raised through MENA IPOs in the first three months of 2015 dropping by 80%, according to EY. Egypt succeeded in bucking the trend to establish itself as the sole arena of IPO activity for the period. Both of the offerings staged in the region in the first quarter of 2015 took place in Cairo, together producing $255.7m for their originators and serving as a timely reminder that the nation’s exchange, despite the economic challenges facing the country, remains a useful funding platform. However, a weak debut in early July 2015 by Emaar Misr, the Egyptian subsidiary of the Dubai-based property developer Emaar, tempered optimism surrounding the bourse somewhat. Its stocks dropped by 1.3% on the same day of its listing, after initially rising by 7% at the start of trading. On the following day Emaar Misr dropped by 9.9% at closing.
Contributory Factors
A number of factors combine to underpin the recent positive trend. An improving macroeconomic situation has played a large part in this. The administration of President Abdel Fattah El Sisi has helped to reduce macroeconomic instability, revising the fiscal regime and opening the door to private sector investment. The effects of stability have been most visible in the rationalisation of energy subsidies during 2014, the introduction of a new tax regime and the speed with which the government has established new infrastructure projects such as the Suez Canal development.
The EGX authorities, for their part, have been quick to capitalise on the improving sentiment. As regional allies stepped up their financial assistance and the nation’s foreign reserve levels began to stabilise in 2014, they began to set about the challenging task of encouraging more unlisted businesses to use the exchange as a route to increasing their capital. In practical terms, this meant holding workshops in collaboration with a range of business associations across the country, aimed at changing perceptions about the exchange, as well as targeting more than 80 promising companies in numerous governorates for a direct approach. The EGX also hosted the country’s first IPO summit in Cairo in 2014, bringing together more than 300 firms and a large number of investment banks and financial institutions. In June 2015 the EGX staged its second investment conference.
New Regulations
In addition, the EGX set about fine-tuning the mechanics of listing in a bid to make the process more attractive to potential new members. As a result, the required listing documents have been reduced by around 50%. The new listing regulations introduced in 2014 also facilitated stock split procedures and introduced a more streamlined capital increase regime, which in some cases has seen approvals for capital hikes granted within 24 hours.
Despite these efforts challenges remain. The key issue for potential listing companies is liquidity, and this has become a critical question with the emergence of regional rivals for global fund flows. The ascension of the Qatar Stock Exchange and the two principal exchanges of the UAE to the influential MSCI Emerging Markets Index, combined with the planned opening of Saudi Arabia’s Tadawul to foreign investors, mean that the EGX’s efforts to project itself as an investment destination for global investors has never been more important, or competitive.
Promotion
In the meantime, the EGX authorities have been assiduously promoting the exchange abroad. In 2014-15 it has worked with Merrill Lynch in New York to meet with financial institutions regarding their investment portfolios, and HSBC Global organised an Egyptian Capital Market Day in the US, which was attended by a range of mutual funds and portfolio managers, as well as a number of prominent companies from the EGX’s main board. The exchange has also received some very timely international recognition over the past year, accepting the Africa Investor “Most Innovative African Stock Exchange” award at a ceremony in the New York Stock Exchange, as well as assuming the presidency of the federation of Euro-Asian Stock Exchanges, ending 20 years of Turkish dominance of the position.
The ability of the EGX to maintain the upward trend in listing activity depends to a large extent on factors beyond its control. The government faces a significant challenge in implementing its fiscal reforms, particularly in the area of subsidy reduction, and the challenging political transition which the country is undergoing represents another downside risk.
For now at least, a bullish mood prevails with regard to Egyptian IPOs. Speaking to the press, Sherif Salem, a portfolio manager for Abu Dhabi-based asset manager Invest AD, summed up the broadly positive view that investors have of the market. “It shows that there is interest in the Egyptian market despite some challenges,” he said. “The macroeconomic fundamentals are improving, but they may be slower than people had hoped for or expected.” The events of early 2015 augur well for both the future IPO pipeline and the broader performance of the exchange, even if the rate of growth has been held in check by Egypt’s recent volatile political and economic situation.
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