A promising year on the Stock Exchange

Sherine Abdel-Razek , Tuesday 2 Jan 2024

Chairman of the Egyptian Stock Exchange Ahmed Al-Sheikh explains the reasons behind the bourse’s exceptional gains during 2023 and its ambitious plans for the year ahead to Sherine Abdel-Razek

Al-Sheikh
Chairman of the Egyptian Stock Exchange Ahmed Al-Sheikh

 

The performance of the Egyptian stock market during the last four months of 2023 took all observers by surprise. 

Egypt’s main index, the EGX 30 which tracks the performance of the 30 most actively traded companies, scored consecutive record highs, enabling it to break the 25,000 points threshold for the first time in its history. 

The index’s gains throughout the year exceeded the returns on most alternative investments like gold and the dollar. One of the main features of the year was also the increased demand for traded shares by individual local investors.

In an interview with Al-Ahram Weekly, Chairman of the Egyptian Stock Exchange Ahmed Al-Sheikh explains the reasons for the upturn, the beginning of which coincided with his appointment in August. 

He also explains plans to launch a carbon credits market and a Sharia-compliant index among other schemes to build on the recovery in 2024.

 

What is your assessment of the Egyptian Stock Exchange’s performance in 2023?

It performed very well. The main index, the EGX30, surged by 70.53 per cent over the year. Market capitalisation of the listed companies increased by 78.9 per cent , reaching LE 1.72 trillion . The outgoing year also saw the inclusion of treasury bills transactions on market screens for the first time. The total value of trade in government securities came to LE 2.68 trillion. The total value of all transactions came toLE3.42 trillion , or up by 213 compared to the previous year. 

 

The EGX30 achieved unprecedented increases from the end of August, breaking one record after another until it surpassed 25,000 points for the first time. What fed these increases?

Investing in the stock market is a natural hedge against spiralling inflation rates. It also offers many advantages over other types of investment. One is the ease of entering or exiting an investment, i.e., by buying or selling listed shares. The pricing of the listed shares or instruments are also determined by supply and demand. 

Your appointment as chair of the exchange coincided with the surge in the market. What measures have been introduced since August to stimulate or support the upward trend?  

The stock market team has maintained direct and fast communication with all market stakeholders. Above all, we have avoided sudden decisions and conducted effective communal dialogue with the stakeholders before announcing any decisions. This approach has been crucial to ensuring a stable and robust market. 

As chairman, I am keen to develop closer communications with brokerage firms. I have already met twice with their executives, and we have agreed to meet regularly every three months. The exchange management also receives and studies proposals from all market stakeholders. We are committed to regulating the market in accordance with international best practices, ensuring that any intervention by cancelling orders or stopping transactions be kept to a minimum and strictly aligned with the regulatory laws. 

For example, a recently introduced regulation has had a positive impact that is appreciated by all market stakeholders. It relates to the temporary halting of trading on the shares of a company in the event the exchange management has to clarify an issue with that company. Previously, the procedure had been to temporarily halt the trading of that stock until the company had answered the management’s inquiries. The system has now been modified to permit a faster response from the company in question both to the market and to shareholders.

 

Despite the exchange’s excellent performance in 2023, especially when compared to the stock markets of other developing nations, the year also brought a noticeable decline in the ratio of foreign to local investors in the market compared to previous years. How do you explain this?

Briefly put, the decline has to do with global and regional economic circumstances, as well as certain difficulties in the domestic economy. However, we anticipate that the situation will improve again in tandem with the ongoing implementation of the government’s economic measures.

 

Gold and dollar prices have risen remarkably, and some savings certificates now offer 20 to 22 per cent interest rates. People are investing more and more in real estate as a store of value. How profitable is investment in stocks compared to these other forms?

I don’t like to say that one form of legitimate and regular investment is better than another. Each type has advantages and limitations that investors need to be aware of to make sound investment decisions.

In addition to the upward trends in the indexes, investing in the market is, as I mentioned, a hedge against inflation, and as a financing platform the stock market is easy to transact in, and its pricing is determined by supply and demand. Also, all the listed companies must comply with standards of transparency that allows investors to form decisions based on clear and sufficient information. Listed companies should also comply with principles of good governance that strengthen their management through institutionalised and more effective decision-making, division of responsibilities, and performance-monitoring mechanisms. 

 

Could you explain what you mean by the stock market as a financing platform?

In fact, financing is the stock market’s main and most crucial role, which many overlook, unfortunately. It is a means for companies to raise capital from diverse sources so they can grow, implement their plans, expand, and realise their future visions. A company can raise capital immediately upon listing its shares on the market because the main shareholders, the ones who sell a portion of their shares in an offering, can re-inject some or all of the returns from the sale of their shares on the stock market into the company. 

For example, one company listed on the Egyptian Stock Exchange since 2021 has raised its capital by LE2.48 billion. Listing stocks on an exchange also makes it possible for companies to raise capital through borrowing by issuing various sorts of bonds depending on their circumstances. 

 

As we begin the new year, how do you predict the stock market will perform in 2024?

I’m optimistic in general. I think the market will react favourably to the economic measures and the development proposals the Stock Exchange board has presented to the public for discussion. 

What are the most important proposals that will be acted on in the coming period?

The proposals address various issues, such as developing the rules for listing securities on the Stock Exchange, improving the trading rules and mechanisms, and setting up and promoting new markets and financial instruments.

 

What are the salient features of the rules for listing securities? 

The last edition of the listing rules was issued in 2014. Several amendments have been introduced since, but now, in coordination with the Financial Regulatory Authority (FRA), we are in the process of producing a new edition. 

In addition to addressing problems that have been observed during the application of the rules, the revisions will take into account market needs, international best practices, and ways to ensure the best possible protection for investors and clients. They will also be more succinct. For example, the executive processes will be merged with the listing rules for the purposes of simplification and avoiding repetition.

We have many proposals to discuss with the FRA. For example, in order to streamline procedures for companies keen to increase their capital, one proposal suggests that companies should submit to the bourse a detailed plan for how they would invest the additional capital. Subsequently, a mechanism would ascertain that the moneys were indeed invested as planned and, in the event of discrepancies, the company would be required to present a detailed report to the company’s general assembly explaining why the discrepancies occurred and how the management intends to remedy them. 

Another proposal suggests studying ways to shorten the subscription period for raising capital. Currently, the process takes a month. Advances in information and communications technology will help streamline things considerably. 

 

What are the main features of the plan to develop a SME Exchange?

We are working on a comprehensive proposal for this. It is based on the philosophy that the small and medium-sized enterprise (SME) market was established as a kind of incubator for promising companies seeking to increase their capital. Part of the plan calls for setting a certain period for SME share listings in this market, during which they will transition to the main stock market. The proposal would require SMEs to submit a detailed plan on how they would make that transition during a three-to-five-year period, depending on the companies’ activities. We have an example of a company that was listed in the SME Exchange and was able to increase its capital enough to transition to the main market in just a year and a half. 

We are also studying whether to increase the minimum required capital for SMEs to be listed in that market. The amount now is LE1 million, which takes into account current economic circumstances. For companies already listed, they will be given an adequate grace period to comply. 

 

In November 2022, Egypt launched the first African Voluntary Carbon Market. How is this progressing?

As part of efforts to strengthen the Egyptian Stock Exchange’s pioneering role in environmental practices, civic responsibility, and corporate governance, the Stock Exchange announced, on the sidelines of the UN COP27 Climate Summit that Egypt hosted in Sharm El-Sheikh in 2022, the launch of AFRICARBONEX, the first voluntary carbon market in Africa. 

The launch of this market was another major step on the path to sustainability that we set out on in 2010. The Egyptian Stock Exchange is the first stock exchange in the Middle East and North Africa and the second in an emerging market in the world to launch a sustainability index in the shape of the S&P/EGX ESG Sustainability Index. 

The exchange is coordinating with the FRA to help brokerage firms trade in carbon certificates, to regulate the processes of listing and trading the listed certificates as a financial instrument, and to approve the rules for trading, clearing and settlement, and licensing registries and verification and certification bodies. 

 

What are the advantages of this market?

First, it is regulated, ie subject to a regulatory authority. This reinforces transparency and credibility. The market allows companies to buy and sell carbon certificates the value of which is pegged to the amount of their carbon emissions. As financial instruments that can be sold and bought on the market, the certificates are a means to generate capital liquidity. The market’s website offers an advanced platform that showcases the enterprises that have issued carbon certificates. The trading system was designed to provide various trading mechanisms, such as one-time or continuous auctions, straightforward sales and purchases, or buyer-seller contracts. It also includes regulated mechanisms for settling executed transactions.

 

Will 2024 see the launch of the Sharia-compliant companies index? What will the criteria be for this?

We are definitely working on it. When this index is launched, it will offer an investment alternative to individuals and organisations looking for investment instruments that comply with Islamic Law. The criteria include lending and borrowing and cash and liquidity ratios with respect to a company’s total assets. To qualify, the ratios must not exceed a certain percentage as agreed on with the Sharia Supervisory Committee and the FRA.

 

What about the Real Estate Index, or the EGREAL as it is called?

First, launching this market requires some legislative amendments to permit for public registration. Bearing this in mind, the Real Estate Index works by converting real-estate assets into shares denominated per square metre and representing an ownership title tradable on the market. The index will serve as a platform enabling investors and real-estate firms to buy and sell shares in real-estate assets and to invest in real-estate development projects. The market would integrate with the conventional real-estate market and real-estate investment funds, yet open opportunities for real-time trading and a more flexible means to invest in the real-estate sector. 

 

And the derivatives market?

The exchange is moving as quickly as possible to launch this market because of the high demand among investors and brokerage firms. Derivative exchanges enable investors to set prices for purchases/sales executed at a certain date in the future. It is a way to reduce risk and hedge against fluctuations in underlying asset prices. 


* A version of this article appears in print in the 4 January, 2024 edition of Al-Ahram Weekly

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