What policies are increasing market capitalisation in Egypt?

The Egyptian Exchange (EGX) is one of the oldest stock markets in the Middle East and can be traced back to 1883. It covers the main market, an over-the-counter market and the Nile Stock Exchange (Nilex), the last of which is a market for small and medium-sized enterprises. As of April 2020 there were 218 companies listed on the main market, which had a total market capitalisation of LE569.8bn ($35.1bn), and 28 listed on the Nilex, with a total market cap of LE1.6bn ($98.6m).

Widely followed market indices include the EGX30 Index, a free-float, market-capitalisation-weighted index of the 30 most-actively traded companies on the EGX; the EGX70 Index, a price index that tracks the performance of the following 70 most active stocks on the main market; and the EGX100 Index, which includes all stocks on the EGX30 and EGX70 indices. In February 2019 the EGX launched a new index called the EGX30 Capped, a free-float, market-capitalisation-weighted index that includes the 30-most-active stocks in terms of liquidity, with each weight capped at 15% and any excess weight distributed among the other companies.

Performance

Egypt is a part of the Morgan Stanley Capital International Emerging Markets Index. From the Egyptian pound’s floatation in late 2016 to December 31, 2019 the EGX30 Index gained around 61% in local currency terms. This came on the back of renewed optimism and regained investor confidence following the signing of a $12bn extended fund facility with the IMF and the implementation of a number of structural reforms under the country’s three-year programme.

Total market transactions in 2019 stood at LE410bn ($25.3bn), averaging a daily turnover of LE1.7bn ($104.8m). Institutional investors accounted for 74% of the total, while retail investors accounted for 26%. In another classification, foreign investors accounted for 33% of total turnover and Egyptian investors for 67%.

The emerging markets’ sell-off in 2019 took its toll on the EGX, delaying the government’s partial asset sale programme, which included a total of 23 companies – 14 initial public offerings and nine secondary offerings – of which only one secondary offering took place: a 4.5% stake in Eastern Company in March 2019.

The EGX ended 2019 trading at an average priceto-earnings multiple of 8.5x and offering an average dividend yield of 8%. In late 2018 Prime Minister Mostafa Madbouly issued a decree on capital market law regulations that allowed companies to issue sukuk (Islamic bonds) and introduced green bonds as debt instruments. The measures also included the regulation of futures contracts for commodities and securities, and amendments to allow for short selling.

Projection

The EGX’s performance is likely to be bullish in 2020 due the Central Bank of Egypt’s accelerated easing cycle, totalling 950 basis points from the start of 2018 to the first quarter of 2020, in addition to recent capital market reforms by the Financial Regulatory Authority (FRA) that lowered the stamp tax on stock market transactions to 0.05% for residents in Egypt and to 0.125% for non-residents, down from 0.15%. It also lowered the tax on cash dividend distributions for listed companies from 10% to 5% and postponed the application for capital gains tax for residents of Egypt until January 1, 2022, while also indefinitely exempting non-residents from paying a capital gains tax.

A rebound in market capitalisation and turnover is anticipated. The Covid-19 pandemic has had its toll on global financial markets as well as Egypt. The country’s market capitalisation is likely to increase from around 15% of GDP in 2019 to 20% by the end of 2024. Market turnover is also anticipated to grow at a compound annual growth rate of 38% in 2020-24, increasing from 48% of market capitalisation in 2019 to 85% by the end of 2024, though still below the 2010 level of 92%. Further, the FRA launched a four-year strategy to develop the non-banking financial sector by 2022, aiming to increase stock market capitalisation-to-GDP to around 50%, market capitalisation to LE3tn ($184.9bn) and the number of companies that are listed on the EGX to 400.