September 2018
7
Mr. Mohamed Farid Saleh
Chairman of the Egyptian Exchange (EGX)
Good afternoon Mr. Farid Saleh,
Firstly I would like to thank you for co-organizing and hosting FEAS 7th Onsite Training.
Let's start our interview with the following question:
How would you characterize the stock market currently?
- I would characterize it as improving. We are trying to implement an aggressive reform plan
that touches the entire value chain of the Egyptian capital markets. From a supply side, as represented by the companies listed and the quality of disclosures, this involves looking at the communication between listed companies and investment banks, asset managers and brokerage companies. We’ve made plenty of effort in this area. We are also working on the intermediation aspect of the markets – the systems of trading, providing more capacity for investors to trade freely, in this environment – while introducing new financial products and tools to be traded in the market. And then we have the demand side, which basically involves facilitating the communication and the enquiry process by investors and trying to create broader financial or investment literacy. We’re working with companies on this on a one-to-one basis, because we need more participation. If you adopt a 20-25 year investment horizon, incremental saving approach, you’re definitely better off investing in capital markets compared to other investment vehicles in general.
If we’re talking about in 25 years having a growing middle income class that is, relatively speaking, wealthier than what we’re seeing now in terms of per capita GDP or per capita income, it has to happen through the capital markets. One amongst several clear differences between Egypt and other advanced markets relates to private pension schemes. In many advanced markets, the pension and insurance systems are quite large, and they are quite well equipped for these types of investments, so participation is high.
For economies like Egypt, we still need to work on expanding the pension system on the one hand and promoting education for the pensioners to be able to invest their money in capital markets, on the other. So we’re trying to address these needs by immediately educating people in the middle income bracket so they can try to invest directly in capital markets via an incremental saving approach mechanism.
And how is this education taking place?
It’s basically pitching to 200-300 employees per company, which is quite unorthodox, but the response and feedback is always positive. People have noted that it is the first time they have seen efforts being made to educate them on what the different products listed in the stock market are and how they can invest in them. We first targeted relatively high paying companies – multinationals and the like – because their employees can afford to accrue incremental savings on a gradual basis. None of the participants are satisfied with only one round – they all want a second. We’ve done our homework also, so we can show them, for instance, if you had invested in EGX 30 in a diversified portfolio in 1998, on a gradual basis, compared to putting your money in FX, or putting your money in gold, this is what your returns would have been. We show them that the differences are significant and can have an impact on their income level in the long run.
We understand that part of EGX’s plan for growth is to add new financial instruments to the Stock Exchange. Can you expand this more?
Both trading mechanisms and financial instruments are very important in the effective functioning and growth of the Stock Exchange. As well as adding new financial instruments, we are trying to simplify the trading mechanisms as much as possible.
So for example we have conducted an extensive study on circuit breakers - a mechanism by which, if the price of a certain stock changes plus or minus 5%, you get to cease other markets – both advanced and emerging – we concluded that 30 minutes was too long a period to cease trading. So we took the decision in my first board meeting September 2017, to reduce the circuit breaker timing from 30 minutes to 15 – which is still quite long. The halt time was again reduced to 10 minutes in October 2018. Then we proposed amendments to something called intraday trading – a trading mechanism whereby there are certain limits on the amount of stocks that you are allowed to trade per day, for certain companies. After taking the opinion of market participants and comparing our situation to that of other markets, we proposed to the regulator that these limits be expanded. So that was another step to facilitate the process of trading in the market.
The impact of dividends on the price of stocks is another important area we have looked at. It is well known that if there is a cash dividend being paid the stock price goes down immediately, with the amount of dividends – because basically this is cash being stripped out of the company. So if you have, for example, a stock of 100 pounds with dividends of 7 pounds, its value automatically decreases by over 5% in spite of not having been traded. It then opens by being suspended, due to the circuit breaker, and this is problematic.
So we have amended how we deal with circuit breakers for stocks that have sizeable dividends in the market.
ETFs – Exchange Traded Funds – are also very important and under-utilized. They are investment funds, however their certificates are being traded in the market. What is the benefit of this? Well, by buying one certificate, you’re effectively buying 30 companies, which is EGX 30, so it’s a very easy means of diversification. We found that this mechanism was not very active and one of the reasons for this is that there was no margin or credit available, due to the regulations. So basically if you buy an ETF, you would do so without being able to both borrow money and buy the ETF. So we have proposed that the ETFs should be traded using a margin, to stimulate activity in this area.
When it comes to financial products, there has recently been a legal amendment to the Capital Markets law that set the regulatory framework for establishing and trading derivatives in the Egyptian market, so that is one of the items that we would want to introduce soon. This will add to the diversity of financial products, enabling investors to hedge their position for risk management purposes - even for investment purposes.
Hopefully if we manage to get the items that everyone is worried about being traded as futures for derivatives, it would be of added value. So for example, everyone is worried about the increased prices of real estate so if we manage to have indices on real estate and accordingly have futures on these indices, you would be able to hedge your position on the assumption that there will be an increase and either make some remuneration towards this price increase or benefit from the price increase, despite not being capable of buying the underlying asset itself. So these are some of the products that we’re tinkering with, and trying to push, in this area.
What are some of the anticipated benefits of the IPO program due to be implemented this year?
A core part of the deepening of capital markets, and the root for attracting FDIs and better participation from the private sector, is through expanding the ownership of state owned enterprises. So what has been announced by the government, represented by the Ministry of Finance, is that they have 23 companies – nine are already listed – to be listed and traded in the market. Hence they are going to expand the number of shares to be floated to the market. This in itself will directly attract new international investors to the market.
Foreign investors often express a need for more sizeable companies to be listed, especially following the devaluation. For someone to be able to put a ticket of 50 million dollars in one company, it could be the value of the entire company – not only the free float – so the more you expand on the free float size in the market, the more opportunities you create for investment.
So definitely the proposed IPO program will be beneficial – not only from a financial perspective for the government, but also because of the discipline required when you are listed on the Exchange. Companies need to abide by the listing rules and requirements, so they need to have quarterly financial statements published on time, board representation needs to be disclosed. So the entire discipline process and governance that happens, due to the listing aspect, improves the company’s performance in general. We need to remember we are not working in a vacuum; we have competition from regional exchanges, regional economies, and international economies. We need to be equal to this and pursue every single reform measure.
So the entire discipline process and governance that happens, due to the listing aspect, improves the company’s performance in general. We need to remember we are not working in a vacuum; we have competition from regional exchanges, regional economies, and international economies. We need to be equal to this and pursue every single reform measure.
About EGX
The Egyptian Exchange is one of the oldest stock markets established in the Middle East. The Egyptian Exchange traces its origins to 1883 when the Alexandria Stock Exchange was established, followed by the Cairo Stock Exchange in 1903.
The vision of EGX is to be a World-Class, Egypt-based Exchange: the Premier Capital Market in the Middle East & North Africa Region that best serves its stakeholders.
The mission of EGX is to operate and develop a high quality market for the benefits of its Egyptian and international clients. EGX will serve and empower its customers by providing top notch market technology, innovative products, fair, transparent and efficient market.
EGX Values
EGX has a set of values that define its culture and belief in applying high standards of ethics and integrity with all its stakeholders:
customers, members, issuers, managers, employees, regulators, the international and local investment communities.
The values comprise the following:
Customers (issuers, members, and investors) come first.
Just and equitable business environment.
High standards of integrity and the highest ethical standards from our employees and market participants. We regulate our market in accordance with international best practices.
Continuous learning and employee training enable EGX to better serve its customers.
Our business, mission and values are comprehended by our employees.
Continuously respond to the changing needs of internal and external environments.
Follow the link below to get more information about The Egyptian Exchange: