The Egyptian Stock Exchange..What Next?

Invest in Egypt but don’t gamble against the odds on the stock market!

The Egyptian Stock Exchange has been closed since the early days of the January 25 Revolution. Following the toppling of Mr. Mubarak a chorus of calls for action, donations and investment in the stock market has been getting louder in the press, social media and even in SMS text messages from banks. The continued closure of the stock market has fueled a high level of anxiety amongst many and with so much excitement about the possibilities for change and progress the wonderful people of Egypt are willing listeners to advice that they think can help Egypt and its economy.

While I am not an economist, I have been at leadership positions of public companies in the US & Europe and I have also been an adjunct lecturer on mergers & acquisitions for a number of years. So what I express here is my personal view as a practitioner who has to deal with issues of stock price, investor sentiment and public markets in general day in and day out and as also as an educator of business students looking at how companies create value and how they are valued.

International investors evaluate numerous factors to make their decisions about expanding their investment in a company, sector or country. Egypt has many important attractions, large population, excellent strategic location, availability of foreign language friendly work force, good access to markets and so forth. However, certain factors have impacted investment in Egypt negatively, specifically corruption, arbitrary & corrupt taxation and an inefficient, slow and often corrupt justice system.

Political stability is another key issue that has affected attitude towards investment in Egypt and likely will continue to do so. I fear that the current plan chosen by the Supreme Council of the Armed Forces, to install a temporary constitution and only move to a permanent one after a round of presidential and parliamentary elections followed by further elections for a drafting committee and further referendums, will prolong the period of uncertainty. The Egyptian Military caution is understandable on a number of fronts and a gradual approach that allows for the building up of democratic institutions over a year or two under a relatively benign military rule has its attractions, but also its price, a price from uncertainly over process, intent and what the ultimate outcome may look like and its desirability.

In a theoretical “perfect market”, the value of a company or a business is a function of one’s view of the future cash profit that a particular company would generate for its owners; stocks or shares represent fraction ownership of a company. Obviously people can have differing views on what the future may hold for a company and thus there will be those willing to buy and others willing to sell. If we assume company in the tourism industry in Egypt, the prospects for future profit and cash generation would have been seen as promising over the last few years, however, today there is little doubt that 2011 will be a difficult one for the tourism sector in Egypt. Companies in the tourism sector may actually make less profit or actually lose money; the value of these companies and their shares is therefore reduced in a “perfect market”.

The situation in any stock market is far from that of a “perfect market”, there are other factors that affect share prices; basic supply and demand for the actual shares and expectations of this supply and demand. If one hears that a shareholder in a specific company will be selling a large block of shares, it is likely that this could affect the price per share. So as we look at a company like Ezzsteel with its Chairman and Managing Director Mr. Ahmed Ezz in prison facing a number of charges, it is unlikely that many investors will be wanting to acquire shares in Ezzsteel when the market does eventually open, arguably many would want to sell shares. The prospects of the steel industry may not have materially changed by the January 25 Revolutions yet, the supply and demand situation of the shares has likely changed. The ownership of a significant percentage of companies listed on the Egyptian Stock Market is concentrated in the hands of large shareholders and it is the perceived and the actual attitude of these large shareholders that could have a decisive effect of the share prices of their companies.

The stock market when it does open in Egypt will likely see a drastic reduction in value because of the expected economic weakness at least for 2011, because of the uncertainty surrounding several prominent business families with large controlling blocks in many listed companies and there will likely be further penalty associated with a perceived higher political instability risk. The positive sentiment associated with the competent corruption fighting government of the new Egyptian Prime Minster will likely not be enough to counter the three big negatives. So there are good reasons for the stock market to go down.

Experience has shown that betting against economic fundamentals can only work in the short term but rarely so in the long term. People who want to avoid or minimize the collapse in the Egyptian stock market need to focus their effort on the three causes; the share prices are the outcome, just the symptoms. A campaign to encourage buying Egyptian made products domestically and internationally would contribute to the health of Egyptian companies more than buying few shares from co-investors of Mr. Ahmed Ezz while his own shares remain frozen. Promoting tourism in an intelligent campaign with significant price reductions and improvement in service is critical to save jobs and businesses in the tourism sector.
Most importantly, is the further thoughtful review of the plans to achieve the objectives of the January 25 Revolution as adopted by the Military. Plans and process to rid Egypt from corruption fix the justice and dispute resolution system and remove the old dictatorial system of Government need to be transparent and inclusive.

Egypt today stands at a high place, admired by the people of the world for its peaceful revolutions and while the army may have hesitated and bungled a number of important matters, it continues to be seen positively globally. In short there is tremendous goodwill by the world Government, people and investment community towards Egypt; now the key priority to focus on the fundamentals.

AA
March 12, 2011