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Political upheaval obscures growth potential: Markaz

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Kuwait Financial Centre Markaz recently published a report on the Egypt Asset Management Industry. In this research report, Markaz analyses the current state of Egypt asset management industry in terms of market structure, market participants, fund performance, regulatory developments and industry challenges. In-depth fund performance analysis based on geographical focus including alpha generated by the fund against respective benchmark and top fund managers based on AUMs being managed have been discussed.

Egypt Asset Management Industry manages $9.3bn of assets in about 88 funds. In terms of products, money market funds leads the pack with 90% share, followed distantly by equities at 4.5%, while the remainder of the assets is spread across fixed income and specialised funds. Of the total assets, conventional funds manage $9.2bn (99%) of assets while Islamic assets are meagre. In terms of the number of funds, there are 34 equity funds, 27 money market funds, 19 specialised funds and 8 fixed income funds.

The AUM/GDP ratio for Egypt stands at mere 3.5% against emerging markets average of 12%, implying lack of mutual fund penetration as an investment option. Egypt asset management market is concentrated among the top asset management companies, with the top three asset managers (out of 21 managers) accounting for 76% of the total assets being managed. Beltone Asset management leads the list of large asset management companies with 41% market share, followed by Al Ahly fund and portfolio Management Company with c.20% market share and EFG-Hermes holding with c.15% market share.

Debt market is smaller in size and remains largely under developed. While corporate issues are few in number, government debt accounts for the majority of issues. Recent measures to issue bonds of varying tenors in an effort to establish sovereign yield curve and introduction of bond trading platform could aid in the development of secondary market for fixed income securities in Egypt. Regulatory framework for issuance of sukuk/Islamic version of bond was introduced very recently and Egypt is yet to see a sukuk issuance.

Egyptian capital markets are dominated by national participants and they accounted for the bulk of trading activity. Based on client category, institutional players and individuals (retail players) are equally active in the secondary markets. Egypt which enjoys relatively younger demographics had hitherto offered defined benefits as part of its pension programme. Currently, 90-95% of pension assets are invested in conservative instruments such as government bonds (67.4% of the total assets) and bank deposits (27.6%) while the remaining (5-10%) are being invested in equities and alternate investments. Though the insurance industry potential is huge, given the size of Egypt’s economy and its development, insurance assets as a percentage of GDP have languished in low single digits for the past 10 years. As the insurance industry is evolving and smaller in size, the role it plays in influencing equity market is minimal.

Starting in spring of 2011, Egypt experienced a wave of citizen protests, causing social and political unrest which eventually led to the dissolving of parliament and resignation of the president. Liquidity drained from the system and stock exchanges were closed for a prolonged period. Unsurprisingly, outbound flow increased over inward fund flow. The addition of political risk to the existing woes of shallow markets, weaker financial laws, and poor corporate governance could only exacerbate the problem.

Currently, more than 77% of the existing funds are less than $50m in size and half the funds amongst them are below $10m in size. The cost of operating such small funds eats away the margins and threatens the viability of business continuity. Paucity of players, who could perform analysis of mutual funds based on risk-return metrics on a forward looking basis, is a big deterrent for retail investors in choosing appropriate funds.

Pension fund assets, which are poorly diversified and lack liquidity in the current form, hold the potential to play a pivotal role if proper reforms are implemented, considering its size in relation to Egyptian GDP. Acceleration of privatisation, introduction of various products to facilitate hedging and enhanced price discovery and increased disclosure norms for listed firms would augur well for the asset management industry.

Kuwait Financial Centre Markaz, established in 1974, has become one of the leading asset management and investment banking institutions in the Arabian Gulf Region with total assets under management of over KD 975m ($ 3.5m) as of 31 December. Markaz was listed on the Kuwait Stock Exchange in 1997.


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