Morgan Stanley, the global stock index company, has revealed an unusual review of the Egyptian economy in its MSCI indices recently as investors in the Egyptian market suffer from the shortage of foreign liquidity.
Morgan Stanley indicated that it will not implement any adjustments in the framework of the upcoming index review for any securities in Egypt classified for listing on the MSCI indices and related composite, derivative and special indices.
It confirmed that it will postpone the inclusion of events related to Egyptian companies that do not need to apply the “price adjustment factor” (PAF), such as subscriptions, share sales, restructurings, and IPOs, and will exceptionally freeze possible relocations according to considerations of size and resulting from events related to companies until another notice regarding Egyptian securities in the MSCI stock indices.
The entry of stock exchanges into global indices such as the Morgan Stanley index or FTSE is one of the tools to attract investment and foreign exchange to the stock exchanges and the country, through the entry of new liquidity and the subsequent expansion of the business of companies linked to the stock exchanges such as brokers, financial research centres, offering managers and others, in addition to the main role of the stock exchange which is financing the availability of liquidity in the market means covering offerings and providing the financing that companies need, not to mention giving a good impression to investors wishing to enter the country through disclosure, transparency, stability and other standards.
MSCI indices criteria
Entering the MSCI indices requires meeting several criteria, on top of which are the daily trading volume and the percentage of free trading, in addition to the market value of the listed companies, and there are 3 companies already.
Money market experts believe that the freezing of the Morgan Stanley index of Egyptian stocks will lead to curbing investments, which will cause more exits by foreign investors who have recorded net sales since the beginning of the year worth EGP 6.3bn.
The main index witnessed a decline of 1.8% to reach the level of 17,326 points, driven by the decline of the CIRCLE share by 2.8%, due to pressure from foreign sales, which recorded EGP 66.9m during the day’s trading. EGX30 decreased by 1.8% to 17,326 points.
Sources in the Egyptian money market warned of delisting Egypt from the Morgan Stanley index, and the impact of this on foreign investments, not only in the Egyptian Exchange, but also in foreign investment.
The sources pointed out that the processes of settling foreign transactions are witnessing delays by banks based on the priority delay by the Central Bank of Egypt.
Impact on Egyptian Exchange
Yasser Al-Masry, Managing Director of the Arab African International Securities, said that the report of the Morgan Stanley index for Egyptian stocks will not have a significant impact on the Egyptian Exchange, especially since foreigners have already recorded large exits since the beginning of this year.
And he expected the continuation of the decline in the Egyptian Exchange indices during the next two days, so that the market absorbs the news and that it returns to normal performance again, pointing out that Egyptians tend to buy in the Egyptian Exchange as a type of investment to preserve the value of money in light of expectations of moving the exchange rate of the pound against the dollar.
He explained that this is the main reason behind expectations that the revision of the Stanley index will not affect trading in the Egyptian market.
Mohamed Maher, head of the Egyptian Capital Market Association (ECMA), said that the impact of Morgan Stanley’s report to freeze Egyptian shares will directly affect foreign transactions in the Egyptian Exchange, which has been declining since the beginning of this year.
Maher added that these indicators will raise the concerns of investors, so confidence must be restored by implementing the promises of the upcoming government offerings at a price acceptable to buyers, in order to take actual steps towards implementing the offerings program.
Problems of foreign investors in Egypt
Amr El Alfy, head of the research department at Prime Holding, said that the MSCI report is just an expression of the problems of foreign investors in Egypt, such as the difficulty of exiting and making remittances, adding that although it is negative news that will lead to a decrease in foreign investments in the short term.
Alfy explained that if the economic situation improves and effective measures are put in place, foreign investments will be pumped to revive the Egyptian market.
Sherif Heshmat, CEO of Arqaam Capital, said that foreign dealings are not in the best conditions due to market conditions and the exchange rate of the pound against the dollar, despite the existence of many investment opportunities and good securities prices at very attractive levels.
He added that foreigners will not stop seizing investment opportunities in the current situation, as conditions are changing rapidly according to the constant change of economic indicators, in addition to the availability of dollar sources of financing during the coming period.
Heshmat expects that the situation in the Egyptian market will improve by the end of the year, especially if dollar funding sources are available or the state exits from some institutions in favour of the private sector.
Ibrahim Al-Nimr, head of the technical analysis department at Naeem Brokerage, confirmed that the Morgan Stanley’s review sheds light on the problems of foreign investment in Egypt, such as the inflexibility of the exchange rate, and the difficulty of foreigners exiting the market, explaining that will directly affect the dealings of foreigners in the Egyptian market during the coming period.
He pointed out that the lack of clarity of vision regarding the exchange rate made investors think of backing away from the decision to move the exchange rate of the pound against the dollar.
He advised investors to keep stocks and companies with a competitive advantage and strong financial solvency, because they are the perfect hedge in light of high inflation.
Mona Mostafa, Director of Trading at Arabeya Online, said that Morgan Stanley’s decision to freeze promotion and amendments will lead to foreigners avoiding the Egyptian market, especially as this index serves as a criterion for investment for them.
Mostafa pointed out that there are many challenges facing the Egyptian market, such as the ambiguity of the exchange rate, the lack of flexibility in the exit of foreign investors, and the lack of confidence of investors in the file of government offerings, despite the promotions carried out by the Egyptian government for shares, which have not yet raised the efficiency of the market.